Colliers International | North America Industrial Highlights | Q3 2009
U.S. and Canadian industrial real estate markets again posted a weak quarter. Demand for industrial space was well below trend and warehouse construction continued to drop. Rents fell again, however, at a reduced rate relative to the past few quarters. Even though the economy registered positive growth in the third quarter, warehouse markets are unlikely to bounce back anytime soon. While the Institute for Supply Management (ISM) manufacturing index posted a second consecutive reading above the critical “50” level (September was 52.6) the business landscape remains somewhat fragile, limiting any sort of recovery. For the rest of 2009 and into early 2010 a further increase in vacancy is anticipated, although at a much reduced rate. With so little construction coming onto the market and forecasts for relatively robust economic expansion over the next few quarters, occupancies should begin to show signs of stabilizing by mid-year.
Warehouse tenants continue to return space to the market.
Third quarter absorption was again negative, with occupied space decreasing by 47.3 million square feet (MSF). Third quarter results were an improvement from last quarter but considerably worse than the year-ago period, when occupied space actually eked out a small gain of 6.0 MSF. This brings year-to-date absorption to –144.3 MSF and leaves occupied space 166.2 MSF below peak levels recorded at the end of Q1 2008. While a large number, this represents just a 1.5% decline in occupied space. Canadian markets also returned space to the market during the third quarter with occupied space declining by 2.4 MSF.
Warehouse construction dips to record low.
Third quarter completions totaled just 11.6 MSF, a sizable drop from the second quarter and the lowest on record. New construction is now just a fraction of that recorded for Q4 2007, when warehouse construction totaled 55.5 MSF. Next quarter’s construction numbers are anticipated to go even lower and stay below 10 MSF for the balance of the year and into 2010. Scarce construction financing and uneconomic rents have halted almost all speculative warehouse development. This was reflected in quarter-end construction activity which registered just 22.4 MSF, a substantial drop from 153.5 MSF under construction at the end of the third quarter of 2007, and marking a new recorded low.
U.S. industrial vacancy rate reaches decade high.
The U.S. industrial warehouse vacancy rate increased by 43 basis points during the third quarter to register 10.53%. This brought the national vacancy rate to a decade high and up by 263 basis points from the fourth quarter of 2007. Of the 55 markets tracked across the country, 47 saw vacancies increase while six registered declines (two saw no change). Canadian warehouse vacancies also increased during the quarter, also jumping by 30 basis points to 6.15%, a level not seen since 1997.
Rents drop just 0.9% during the quarter.
Third quarter warehouse rents posted a surprisingly mild decrease falling just 0.9% to $5.04 per square foot. With this latest decrease, U.S. warehouse rents are down 9.9% over the past year and 11.6% from the peak recorded in Q4 2007. Anecdotal evidence suggests landlords have dropped rents as far as they can and are now relying on non-monetary incentives to attract tenants to their property. Canadian warehouse rents also decreased 0.9% during the quarter to $7.01 CAD per square foot.