Logistics Weathering Storm for Now, Though Market Likely to Soften

While demand in many areas of commercial real estate has dropped since 2007, logistics properties are weathering the economic storms a little more safely, according to a logistics research report prepared by Grubb & Ellis Co.“The outsourcing of U.S. manufacturing jobs to China, Mexico and other countries with low labor costs has given rise to a sophisticated logistics industry focused on bringing products manufactured abroad into and through the U.S. to their intended destinations,” stated Robert Bach, Grubb & Ellis senior vice president & chief economist, in the report. “Supply chains have become longer and more complex and logistics buildings are the points in the supply chains where the products being shipped are transferred from one mode of transportation to another. Supply chains and logistics buildings have become the focus for manufacturers who are intent on ringing cost savings from their operations,” he added. So, what is the outlook for logistics properties? Not entirely gloomy, the report stated. Demand for logistics space tends to hold up better when the economy slows than demand for other types of industrial space. Manufacturers need to store excess inventories when their sales slow, which boosts demand for warehouse space. Longer-term, businesses look at logistics space as a productivity enhancer, an integral part of their supply chain strategies. The relentless quest for cost-saving efficiencies by businesses should cushion the fall in demand for logistics space even as the economy struggles in 2009. Another positive is that the construction pipeline for logistics space is emptying rapidly according to the Grubb & Ellis information. However, market conditions will soften over the next few quarters. Even Class A logistics space could see several quarters of negative net absorption, which would be the first time this decade, the report stated. The construction of new, Class A logistics buildings is the major force driving up the industrial vacancy rate, according to the report. The overall industrial market ended 2008 with a vacancy rate of 8.8 percent, an increase of 110 basis points from year-end 2007. By comparison, the vacancy rate for logistics properties gained 260 basis points ending the year at 11.7 percent, while vacancy in Class A logistics properties rose by 330 basis points to 15.6 percent. Other (non-logistics) industrial properties recorded a moderate 40-basis-point increase, ending 2008 at 7.6 percent vacant, the report stated. At year-end 2008, meanwhile the national average asking rental rates for logistic properties was $4.16 per square-foot per year triple net, 3 percent less than the cyclical peak of $4.29 in fourth quarter 2007. Gaining 260 basis points, the vacancy rate ended 2008 at 11.7 percent.