U.S. Industrial Market Finishes 2010 on a High Note
The U.S. industrial market finished 2010 with a notable surge capping off three consecutive quarters of positive absorption. Solid demand for warehouse space in most regions coupled with minimal construction created the conditions for a sudden reversal in vacancy, and almost certainly heralds the beginning of the next cycle. The vacancy rate dropped nationally by nearly a quarter of a percentage point during the quarter—significantly more in select markets. Despite newfound optimism and a noticeable pick-up in leasing activity, warehouse rents fell over the quarter, dropping by 2.1 percent to $4.60 per square foot.
With the economy registering healthy growth in the fourth quarter, and similar expansion anticipated in coming quarters, demand for warehouse space is expected to increase as the year progresses. A giant positive for industrial markets is the continued rise in import and export activity which continues to benefit not only key port markets, but also any distribution nodes that are part of the supply chain. Another positive for warehouse markets is manufacturing, which continues to show surprising growth as measured by the Institute for Supply Management (ISM) manufacturing index. For January the ISM manufacturing index registered 60.8—the highest level in nearly seven years and well above the critical 50 level that indicates expansion. As 2011 unfolds the industrial market is expected to improve on the back of a thriving manufacturing sector and further increases in global trade.
Although signs of a true rebound in the warehouse market are still a few quarters away, almost all economic indicators suggest demand for warehouse space will only increase during 2011. With almost no new warehouse construction coming onto the market, even a modest bounce-back in demand will quickly translate into stronger fundamentals. Rents, however, are unlikely to firm up until vacancies drop below 10.0 percent, which should occur by year end. For most landlords and investors, the best that can be hoped for is rising occupancy and fewer incentives. For tenants, 2011 is an opportune time to sign a new lease, as 2012 will almost certainly be the inflection period when warehouse rents begin their upward march.
Occupancies rise for third consecutive quarter.
For the third consecutive three-month period, industrial markets registered an increase in occupied space. For the fourth quarter, net absorption totaled 28.6 million square feet (MSF)—a large increase from the third quarter, when occupied space increased by just 3.6 MSF, and in sharp contrast to the 17.6 MSF of industrial space returned to the market in the Q4 2009. For the year, absorption totaled 23.7 MSF compared with –160.7 MSF in 2009. Of the 55 markets tracked in the U.S., 33 reported positive absorption during the fourth quarter; however, sizeable gains in four (Inland Empire, New Jersey, Chicago and Dallas) of the Big Five markets drove up the national number. Canadian markets ended the year on a somewhat muted note, however, full-year absorption totaled 16.7 MSF, a stark turnaround from 2009 when occupied space shrank by 700,000 square feet.
Warehouse construction still at low levels but up from previous quarter.
Fourth quarter completions totaled 9.4 MSF, a substantial increase from the third quarter when 4.4 MSF were delivered to the market, and a modest increase from 7.0 MSF completed in Q4 2009. Of the 9.4 MSF delivered, 71 percent was build-to-suit and 29 percent was speculative construction. In the coming quarters construction is anticipated to be largely build-to-suit, with only 15 percent under construction at year-end classified as speculative. Quarter-end construction activity totaled 22.7 MSF, a modest increase from 18.6 MSF underway at the end of the third quarter but well below the 107.0 MSF recorded two years ago. Canadian construction remained subdued with merely 500,000 square feet completed in Q4 bringing annual construction to 4.6 MSF. In 2009 Canadian warehouse construction totaled 15.7 MSF.
U.S. industrial vacancy rate registers sharp drop during the quarter.
The U.S. industrial warehouse vacancy rate dropped 22 basis points during the fourth quarter to register 10.74 percent. After a very slight increase in the third quarter, this brings the national vacancy rate back to where it began the year. Vacancies in many markets appear to have peaked and are expected to drift lower over the coming quarters. About three of every four tracked U.S. markets (41 out of 55) saw vacancy decrease in Q4 while the balance registered no change or a modest increase. Canadian warehouse vacancies were little changed, increasing by just 4 basis points during the quarter to average 5.56 percent.
Rents continue to go lower despite a pick-up in demand.
In spite of improvements in demand for industrial warehouse space, industrial rents moved lower during the fourth quarter. Warehouse rents fell 2.1 percent to register $4.60 per square foot while bulk rents dropped 2.0 percent to average $4.13 per square foot, flex rents marginally increased $0.04 to $8.54 per square foot and R&D rents slipped $0.21 to $10.00 per square foot. Canadian industrial rents largely held steady during the quarter with warehouse, bulk, R&D and flex all registering increases/decreases of less than 1.0 percent.
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