Industrial Market Slows, But Newest Space Does Well

The U.S. industrial property market is sagging somewhat along with the national economy, but certain segments of the business are doing fairly well despite macroeconomic conditions, according to a new report on the national industrial market by brokerage giant Marcus & Millichap Real Estate Investment Services. As with most downturns, newer, more efficient properties are the winners, while older properties aren’t doing as well.”Elevated fuel prices and rising production costs have made it increasingly important for companies to create logistics efficiencies,” the company’s 2008 National Industrial Report says. “As a result, newer industrial properties that offer the most modern features, including higher clear heights, larger truck bays and advanced fiberoptic wiring for logistics management, are in strong demand.” Much of this newer space is still in development as spec space. The report notes that developers ramped up their activity over the past year, with the result that about 70 percent of total square footage now under construction isn’t leased. At the same time, demand for industrial space is slacking off. The upshot of those two trends will be upward pressure on industrial vacancies and a check on rental growth in most parts of the country. Marcus & Millichap predicts that the national vacancy rate will rise about 70 basis points over the course of 2008 to 10.2 percent by year’s end. Older space will be on the short end of that stick, as tenants relocated to newer space. As for rents, the report expects effective rents to increase 1.7 percent for the year, compared with a 3.3 percent rise in 2007. Certain local industrial markets will do considerably better than the norm, the report adds. Buoyed by activity at the ports of Los Angeles and Long Beach, metro LA is among the tightest in the nation in 2008, as it was in 2007, though vacancies will edge up a little by the end of this year to 4.1 percent. At the other end of the spectrum, metro Detroit — which has been hit hard by the woes of the automotive industry — is expected to have the nation’s highest industrial vacancy rate by the end of the year, topping out at 15 percent, despite limited construction activity and the continued removal of obsolete stock from the market’s inventory.