Colliers North American Industrial Highlights 2Q-2010
After returning space to the market in the first three months of the year, industrial markets across the U.S. collectively absorbed 13.3 million square feet of warehouse space during the second quarter. New construction remained muted which helped to push the vacancy rate down to finish the quarter at 10.97 percent. Despite the increase in occupied space, rents generally fell over the quarter.
Even though the economy registered reasonable growth in the second quarter, further economic expansion is only expected to be modest in the coming quarters. While detracting from GDP growth, imports in particular surged during the second quarter which acted as a net positive for many U.S. industrial markets. Although the Institute for Supply Management (ISM) manufacturing index for July posted its third consecutive drop to register 55.5, the most recent reading is still well above the critical “50” level, showing the manufacturing sector is still in expansion mode. For the next few quarters the industrial market is likely to form a bottom before any robust recovery can occur. With almost no new warehouse construction coming onto the market, even a modest bounce back in demand will quickly translate into stronger fundamentals. Rents are expected to firm up by year-end, but apart from a few select markets, warehouse lease rates are not expected to show any appreciable increase until the second half of 2011 at the earliest. Canadian warehouse markets by comparison registered a relatively lackluster quarter with increasing signs the domestic economy will decelerate as the year progresses and warehouse markets will be largely directionless.
Absorption back in the black.
With 13.3 million square feet (MSF) of warehouse space absorbed during the second quarter, U.S. industrial markets posted their first increase in occupied space since early 2008. This was in sharp contrast to the 19.3 MSF of negative absorption in Q1 and 57.4 MSF of space that was returned to the market a year ago. At midyear, year-to-date absorption totaled -6.0 MSF compared with -97.0 MSF for the same period in 2009. Of the 53 markets tracked in the U.S., 35 reported positive absorption during the second quarter, while in Canada, six of the ten tracked markets registered an increase in occupied space.
Warehouse construction up for the quarter but well below year-ago levels.
Second quarter completions totaled 7.9 MSF, a modest increase from the first quarter when 3.3 MSF was delivered to the market but less than half the 16.7 MSF completed in Q2 2009. Of the 7.9 MSF delivered, 73 percent was build-to-suit and 27 percent speculative construction. In the coming quarters construction is anticipated to resume its downward trend with exceptionally low levels of construction expected to persist for the balance of 2010 and into 2011. Quarter-end construction activity totaled 14.1 MSF, a modest decrease from the 16.1 MSF that was under construction at the end of the first quarter and well below levels recorded a year ago when 35.0 MSF was underway. Canadian construction also remained subdued with just 1.9 MSF completed during the quarter.
U.S. industrial vacancy rate down in Q2, the first decrease since last quarter of 2007.
The U.S. industrial warehouse vacancy rate dropped by 10 basis points during the second quarter to register 10.97 percent. This was the first decrease since the fourth quarter of 2007 and possibly marks a turning point for the U.S warehouse market. Of the 53 markets tracked across the country, 33 saw vacancies increase while 20 registered no change or declines. Canadian warehouse vacancies, however, increased by 20 basis points during the quarter to register 5.94 percent.
Despite firmer demand, rents move lower.
Even with the benefit of increased demand, industrial rents generally drifted lower during the second quarter. Warehouse rents fell 1.9 percent to register $4.78 per square foot while bulk rents declined 0.3 percent to $4.22 per square foot, flex rents slipped 2.3 percent to $8.68 per square foot and R&D rents dropped 4.0 percent to $10.05 per square foot. Canadian industrial rents largely held steady across the board with warehouse, bulk, R&D and flex all registering little change.