SANTA ANA, CA--· The bad news was that the vacancy rate increased to 10.4 percent in the third quarter, a 15-year high.
The good news: The rate of increase was 30 basis points, well below the first and second quarter gains of 70 and 60 basis points, respectively.
This trend was evident as well in the office, retail and apartment sectors.
Industrial vacancy was lowest in Los Angeles County at 3.2 percent, although the availability rate of 8.7 percent suggests that vacancy is poised to rise as leases expire. Vacancy was highest at 15.2 percent in Phoenix, a region hit hard by the housing slump and job losses.
· Absorption was sharply negative for a third consecutive quarter as tenants vacated a net total of 32.3 million square feet. Still, this was a slight improvement from the first and second quarter totals of minus 39.8 and minus 51.7 million square feet. Deliveries were at their lowest level of the decade at just 7.1 million square feet, a sign of how thoroughly developers and lenders have cut back.
Negative absorption was most pronounced in Northern and Central New Jersey where occupiers returned a net total of 3.8 million square feet to the market. Nevertheless, this was a vast improvement from the 9 million square feet emptied in the second quarter.
Eleven of the 56 markets tracked by Grubb & Ellis recorded positive third quarter absorption. The Greater Philadelphia region, encompassing Central and Eastern Pennsylvania, led with 523,000 square feet.
· Space under construction plunged to 24 million square feet at the end of the third quarter, its lowest level since the mid-1990s. Philadelphia led all markets with 2.6 million square feet remaining in the pipeline, down from a recent peak of 9.5 million square feet in the third quarter of 2008.
· The average asking rental rate for all types of industrial space offered on the market at the end of the third quarter was $5.34 per square foot per year triple net, a decline of 6.7 percent from the year-ago quarter. The average effective rental rate for industrial space year-to-date declined by 12 percent compared with the annual average for 2008, pushed lower by generous periods of free rent and other concessions to tenants.
Forecast
There are some signs in the economy and the industrial market itself that this brutal softening cycle could be approaching a bottom.
Many economists including Federal Reserve Chairman Ben Bernanke (bottom left photo) think the recession is over, although a majority thinks the recovery will be very sluggish, particularly in the labor market.
Both imports and exports are on the rise as global trade resumes following precipitous drops last fall. The increase in imports is vital for port-adjacent industrial markets such as California’s Inland Empire, while the increase in exports will support manufacturing-oriented markets such as parts of the Midwest.
Retail sales have posted modest increases in recent months, which is significant for markets where retailers locate their distribution centers.
Even the long-suffering labor market is showing some signs of life as weekly jobless claims, though still elevated, are at their lowest level since the first week of the year.
Commercial real estate usually is the last industry to recover from a recession, but the slower pace of deterioration in the third quarter raises hope that a market bottom is not too far off. Look for industrial leasing market fundamentals to level out by the middle of 2010 and embark on a slow recovery beginning in 2011.
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