North American Industrial Highlights 3Q 10

by CoyDavidson on November 5, 2010

U.S. Industrial Market Registers Further Gains

After beginning the year on a weak note, industrial markets across the U.S. collectively absorbed 3.6 million square feet in the third quarter. This was in addition to 13.3 million square feet of positive absorption in the second quarter. New construction remained absent from most markets and will be a key factor lowering vacancy in the coming quarters. For the third quarter, industrial vacancy was little changed at 11.01 percent. Despite the recent firming in fundamentals, rents generally fell over the quarter, falling 0.8% to $4.74 per square foot.

With the economy registering only modest growth in the third quarter, and similar expansion anticipated in the coming quarters, demand for warehouse space is expected to be tepid at best. Positive for industrial markets is the continued surge in imports which, while detracting from GDP growth, acted as a net positive for the U.S. industrial market. Another positive for warehouse markets is manufacturing, which continued to show growth as measured by the Institute for Supply Management (ISM) manufacturing index. For October the ISM manufacturing index registered 56.9, well above the critical “50” level, indicating expansion. Over the next few quarters, the industrial market is expected to continue forming a bottom with a fairly robust recovery expected by late 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 are expected to firm up by year-end and then remain flat, with the exception of a few select markets where there is a mismatch between demand and what is available for lease.

Occupancies rise for second consecutive quarter

For the second consecutive three month period, industrial markets registered a modest increase in occupied space. For the third quarter, net absorption totaled 3.6 million square feet (MSF). This came on the heels of a surprise return to occupancy gains in the second quarter when absorption registered 14.5 MSF. Indeed, in the second quarter the U.S. industrial market posted the first increase in occupied space since early 2008. This was in sharp contrast to the 47.3 MSF of industrial space that was returned to the market a year ago. By the end of the third quarter, year to-date absorption totaled –1.2 MSF compared with –144.3 MSF for the same period in 2009. Of the 54 markets tracked in the U.S., 40 reported positive absorption during the third quarter, however, three (New Jersey, Chicago and Dallas) of the big five reported sharply negative numbers pulling the national number down. In Canada nine of the eleven markets monitored registered an increase in occupied space.

Warehouse construction resumes downward trend

Third quarter completions totaled 4.4 MSF, a modest decrease from the second quarter when 9.8 MSF was delivered to the market and noticeably less than the 11.9 MSF completed in Q3 2009. Of the 4.4 MSF delivered, 77 percent was build-to-suit and 23 percent speculative construction. In the coming quarters construction is anticipated to remain largely absent with exceptionally low levels of construction for the foreseeable future. Quarter-end construction activity totaled 18.6 MSF, a modest increase from 14.1 MSF at the end of the second quarter and well below levels recorded two years ago when 107.0 MSF was underway. Canadian construction also remained subdued with just 2.1 MSF completed during the quarter.

U.S. industrial vacancy rate holds steady during the quarter

The U.S. industrial warehouse vacancy rate held steady during the third quarter registering 11.01 percent. This was after a modest move down in the second quarter when the national vacancy rate fell 10 basis points. This confirms our view that vacancies have peaked and will start drifting lower over the coming quarters. Of the 54 markets tracked across the country, 19 saw vacancies increase while the balance registered no change or declines. Canadian warehouse vacancies fell by 25 basis points during the quarter to register 5.63 percent.

Despite a firming in demand, rents move lower

Even with the benefit of back-to-back increases in occupied space, industrial rents by and large drifted lower during the third quarter. Warehouse rents fell $0.04 to register $4.74 per square foot while bulk rents largely held steady at $4.21 per square foot, flex rents slipped $0.18 to $8.50 per square foot and R&D rents increased $0.16 to $10.21 per square foot. Canadian industrial rents all drifted marginally lower during the quarter.

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