North American Industrial Highlights – 2Q 2011
The U.S. industrial market continued to be the commercial real estate universe’s star performer this quarter. Solid demand for warehouse space in most markets coupled with minimal construction led to another modest decline in the national vacancy rate. Vacancies dropped in the majority of markets and every region reported a lower vacancy rate for the quarter. Despite a considerable increase in occupancy, warehouse rents registered a modest decrease, continuing a three and a half year trend.
The outlook for the rest of 2011 is not so sanguine. With the economy decelerating and continued unease concerning future tax and spending policies, many businesses are likely to delay expansion and reduce aggregate demand for warehouse space in the coming months. In spite of relatively robust exports (year-over-year growth of 17 percent) and considerable growth in manufacturing, the macro economic environment has cooled significantly relative to the latter half of 2010. In recent months, consumer spending—including retail sales—has slowed, creating a further headwind for the industrial market. All indications are that the manufacturing sector will stay relatively robust, but will not be enough to sustain the growth in occupancy experienced over the last few quarters. With the latest slowdown in the economy, a true rebound in the warehouse market is unlikely to occur before well into 2012. Warehouse construction, however, will remain at very low levels, so any incremental increase in occupancies will immediately translate into lower vacancy rates. Except for highcube, high-efficiency space, rents are unlikely to increase in any meaningful way until the latter half of 2012—at the earliest. For most landlords and investors, the best that can be expected in the coming quarters is a modest increase in occupancies and the promise of a stronger economy in 2012.
Occupancies rise for fifth consecutive quarter. During the second quarter, net absorption totaled 35.2 million square feet (MSF)—a substantial increase from the first quarter, when occupied space increased by 24.6 MSF, and more than three-fold last year’s 10.4 MSF recorded in the second quarter of 2010. An increasing number of markets reported increases in occupied space. Of the 61 markets tracked in the U.S., 47 (77 percent vs. 68 percent in Q1 2011) reported positive absorption during the second quarter; however, the West and South accounted for the lion’s share of the country’s absorption, with occupied space increasing by 15.3 MSF and 10.7 MSF respectively. Canadian markets began the year in robust fashion with first quarter absorption reaching almost 7.4 MSF, considerably above the 6.0 MSF in Q1.
Warehouse construction drops back to first-half 2010 levels. Second quarter completions totaled 10.4 MSF, a significant increase from the first quarter when 2.5 MSF were delivered to market, and consistent with delivery levels registered in Q4 2010. Of the 10.4 MSF delivered, 52 percent was build-to-suit and the balance was classified as speculative (spec) construction. In contrast, last quarter’s build-to-suit deliveries accounted for 86 percent of completions. In the coming quarters most construction is anticipated to be build-to-suit once again, with only 18 percent under construction at the end of the second quarter classified as speculative. Quarter-end construction activity totaled 27.6 MSF, a modest decrease from the 29.4 MSF underway at the end of the first quarter, and well below the 124.0 MSF recorded three years ago. Canadian construction took a sharp jump with 3.7 MSF completed in Q2, bringing year-to-date construction to 4.1 MSF.
U.S. industrial vacancies drop 23 basis points. The U.S. industrial warehouse vacancy rate dropped 23 basis points during the second quarter to register 10.33 percent (100 basis points equals one percent). This latest decrease leaves the national vacancy rate 70 basis points lower than a year ago. Even more encouraging are the decreasing vacancy levels that the majority of markets are seeing. In Q2 2011, 48 of the 61 markets tracked registered a decrease in vacancy from Q1 2011. Canadian warehouse vacancies also dropped, falling by 35 basis points during the quarter to average 4.90 percent.
Industrial rents nearly flat for the quarter. After three years of consistently lower rents, industrial warehouse lease rates fell by just one cent during the second quarter. Warehouse rents registered $4.63 per square foot at the end of the quarter and have fallen by $1.23 per square foot since the fourth quarter of 2007—a decline of 20.9%. Bulk warehouse rents also fell during the quarter to average $4.32 per square foot, while flex rents slipped $0.02 and R&D rents increased $0.51 per square foot. Canadian industrial warehouse rents by comparison were up during the quarter rising by C$0.15 to average C$7.14 per square foot.
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