C&W: Industrial Market Continues Downward Spiral in Q1

It was a grim quarter for the industrial real estate market. The first three months of 2009 saw the sector’s average vacancy rate climb up to 9 percent from 8.3 percent in the fourth quarter of 2008 and 7.2 percent one year ago, marking a four-year high. That is just some of the discouraging news from real estate services firm Cushman & Wakefield Inc.’s latest quarterly MarketBeat report. On the bright side, some factors indicate that the speed of the market’s downward spiral may slow down in the not-too-distant future. Only two markets, the San Francisco Peninsula area and Suburban Maryland, can claim to have played no role in the year-over-year increase of the overall national industrial vacancy rate, having each recorded decreases of 0.2 percent. Southern California’s Inland Empire market, on the other hand, surpassed all other markets in vacancy growth; its Q1 2009 vacancy rate of 12.9 percent was more than double its Q1 2008 rate of 6.2 percent. The big winner of the quarter was the Los Angeles-North submarket, which, despite a 0.9 percent year-over-year increase, had an enviably low vacancy rate of just 3.5 percent. Fredericksburg, Va., rounded out the bottom with a sky-high vacancy rate of 21.5 percent. The nationwide decline, according to Cushman & Wakefield, was spurred by such dynamics as companies downsizing due to declining consumer demand and new properties hitting the market without any lease commitments. First quarter leasing performance, in general, was dismal. Year-over-year activity plummeted, going from 67.2 million square feet in Q1 2008 to 48.4 million square feet this year. Only the Baltimore, Dallas/Ft. Worth and Phoenix areas reported gains. And not surprisingly, considering the continuing frostiness of the credit markets, sales transactions were few and far between, encompassing a mere 8.5 million square feet. News in the Cushman & Wakefield report, however, isn’t all bad. As tenants angle to exploit the aggressive rental rates being offered by eager property owners, leasing activity is expected to increase. Additionally, with the number of construction projects having dropped drastically–from 98 million square feet in Q4 2008 to a 14-year low of 32.2 million square feet in Q1 2009–the gap between supply and demand will not continue to grow at the same rapid pace. Regardless of any positive indicators, the state of the industrial real estate sector will likely remain lackluster for the foreseeable future. “Industrial markets, from a capital markets standpoint, are still bumping along near the bottom and will continue to bump along near the bottom for the rest of the year,” Michael McKiernan, executive managing director of Cushman & Wakefield’s U.S. industrial services group, told CPN. Not even the billions and billions of federal stimulus dollars being pumped into the economy will revive the industrial market any time soon. “The stimulus package will start to have an impact on the general economy at some point, but commercial real estate is a lagging indicator, not a leading indicator,” McKiernan said. “We lag 8 to 12 months behind general economic conditions, so it will take that period to see any recovery. That’s the good news and the bad news.”