Monday, July 27, 2009

Industrial Market Softens as Average Vacancy Climbs to 10.7%

SANTA ANA, CA, July 27, 2009--Bob Bach, (top right photo) senior vice president and chief economist at Grubb & Ellis Co., reports the industrial market is softening at a record pace. Here are the highlights of his report:

The pace of softening intensified in the second quarter as the vacancy rate soared by 120 basis points to end the quarter at 10.7 percent. This was by far the largest one-quarter gain in the 22-year history of Grubb & Ellis’ survey, easily breaking the record of 70 basis points set in the prior quarter.

Vacancy was lowest in Los Angeles County at 3.1 percent, although the availability rate of 8.3 percent indicates that the vacancy rate will rise as leases expire. Vacancy was highest at 19.7 percent in Kalamazoo, Mich., a region that is working hard to shore up its industrial base.

Net absorption was mired deep in the red for a second consecutive quarter, registering negative 43 million square feet on top of the 40 million square feet vacated in the first quarter.

The silver lining was that only 13 million square feet was completed, the lowest quarterly total in nearly five years.

Users in Northern and Central New Jersey gave back nearly 9 million square feet of space, far ahead of second-place Atlanta where just shy of 6 million square feet was returned. Twelve of the 58 markets tracked by Grubb & Ellis did manage to stay in the black, led by Denver with 813,000 square feet of positive absorption.

Space under construction plunged to 27 million square feet at the end of the second quarter, its lowest level since at least the early 1990s. The Greater Philadelphia region, encompassing Central and Eastern Pennsylvania, led all markets with 4.1 million square feet yet to be completed, followed by second-place Houston with 2.6 million square feet.

Southern California’s Inland Empire, a longtime construction leader where nearly 22 million square feet was delivered in 2007, ended the second quarter with just 1.6 million square feet in the pipeline.

The average asking rental rate for all types of industrial space offered on the market at the end of the quarter was $5.54 per square foot per year triple net, a decline of 2.7 percent from the year-ago quarter.
The average effective rental rate declined by 22 percent over the past four quarters, driven lower by generous periods of free rent and other concessions to tenants.


The industrial market is not living up to its reputation for relatively moderate swings in leasing market cycles. The 120 basis-point increase in the vacancy rate during the second quarter was the fastest pace of softening among the four core property types.

The drivers of demand for industrial space – retail sales, logistics, global trade and the construction industry – all have taken big hits in the current recession.

The sharp increase in the second quarter vacancy rate to 10.7 percent raises the possibility that the market may come close to the previous record of 13.7 percent posted in the first quarter of 1992.

Ironically, given the rapid pace of deterioration, the industrial market could be the first to turn around.

China’s efforts to rescue its economy – a $586 billion stimulus package (larger as a share of GDP than the U.S. stimulus) and a robust expansion of credit by the state-controlled banking system – appear to be putting the country on track to achieve its GDP growth target of 8 percent this year.

This is a hopeful sign for U.S. exports and, by extension, demand for light assembly and warehouse/distribution space.

Contact: Janice McDill, Direct: 312.698.6707• Fax: 312.698.5941

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