Despite Faltering Economy, Industrial Sector Remains Stable

The national industrial property market is in a relatively healthy state in spite of the recent economic uncertainty, according to a soon-to-be-released report on the sector by Marcus & Millichap Real Estate Investment Services.“For the most part the industrial market is in a stable equilibrium for supply and demand,” Alan Pontius (pictured), national director of office and industrial properties for Marcus & Millichap, told CPN this morning. “The shorter term pains of increased supply on a speculative basis and a small increase in vacancy exist, but the market’s fundamentals continue to remain reasonably strong.” While certain markets, like California’s Inland Empire, are expected to get ahead of themselves in terms of their supply and demand balance, the national market as a whole is expected to remain consistent, explained Pontius. The report estimates that the combination of new supply and easing industrial demand will result in a 70 basis point increase in the national vacancy rate. The predicted increase to 10.2 percent–up from 9.5 percent a year ago–is due in large part to the fact that 70 percent of the total square footage under construction for this year has yet to be leased. Pontius explained that while the vacancy rate is expected to increase, the rise would not be substantial enough to cause any major hiccups in the sector. Pontius offered the analysis during an exclusive preview of Marcus & Millichap’s Midyear 2008 National Industrial Report. The report contains an analysis of the group’s National Industrial Index, which evaluates supply and demand factors for 24 major U.S. industrial markets. Marcus & Millichap projects that 147 million square feet of industrial space will come online this year, down from 160 million square feet a year ago. Additionally, inventory coming on line this year is predicted to add up to only 1.7 percent of the total national inventory. By contrast, since 1999 new construction has increased industrial inventory by an average of 1.8 percent each year. The National Industrial Index analyzes and ranks major metropolitan areas based on factors such as expected employment growth, vacancy, construction and rent growth. Pontius emphasized that the index ranks each market based upon its supply demand equation and its forecast for potential growth relative to one another. With this in mind, Los Angeles remained at the top spot of the index for its consistently strong supply and demand fundamentals and its continued activity at the ports of Los Angeles and Long Beach. The nation’s top industrial market is also home to the nation’s lowest expected vacancy rate, 4.1 percent. Houston jumped to the second place spot after being ranked eighth a year ago. The six spot improvement was due in large part to posting the largest vacancy decline, down 40 basis points, in this year’s ranking and to congestion in the Los Angeles ports. Pacific Coast markets took six of the top 10 spots in the index. Portland (No. 5), Oakland (No. 6) and San Francisco (No. 10) all broke into the top ten as they improved six, nine and eight spots respectively from a year ago. Portland and Oakland were aided by forecasts for increased port activity and San Francisco improved because of the expansion of its healthcare and biotech industries. Seattle (No. 3) and Orange County (No. 7) also represent the West Coast markets. Rounding out the top 10 are Miami (No. 4), New York City-Northern New Jersey (No. 8) and Dallas/Fort Worth (No. 9).