Rising Vacancies, Falling Rents Catch Up to Sector

The industrial market in the United States has been holding its own so far this year, but the market will show increasing signs of strain during the next several quarters, according to a national assessment of 62 markets released last week by Jones Lang LaSalle Inc. Vacancy in properties of at least 50,000 square feet clocked in at 9.1 percent for the first half of the year. But that figure will probably rise to between 10 and 12 percent during the next six months as the effect of the sluggish economy starts to take hold. Specifically, vacancy in the nearly 3.4 billion-square-foot inventory of distribution facilities will edge up from 13.1 percent at midyear to between 14 percent and 16 percent in 2009. Major industrial markets are experiencing mixed results. Among the occupancy gainers are Dallas, Houston, Chicago and Philadelphia. Houston is an especially strong performer that enjoyed a first-half vacancy rate of only 6.1 percent on the strength of population growth and its oil-and-gas industry. Meanwhile, occupancy slipped in Atlanta, Northern New Jersey and the Los Angeles/Orange County/Inland Empire region. Even so, the 6.1 percent vacancy rate in the Southern California region ranks as one of the nation’s tightest. Although asking rents have been holding steady over the past year, increasing about 0.3 percent for the entire sector, the tide is turning in favor of tenants, Jones Lang LaSalle reports. Declining demand and rising occupancy in many markets will give tenants the leverage to demand more favorable pricing and increased conditions, forcing landlords to be more aggressive. That should lead to a decline in asking rents for at least the rest of the year. Meanwhile, construction is continuing at a relatively modest pace. New development should add about 35 million square feet of inventory in major industrial markets, much of it concentrated in the Inland Empire region east of Los Angeles. But Jones Lang LaSalle expects developers and their clients to hold off construction on many planned projects in the face of slowing demand. On the investment sales front, the industrial sector is taking a major hit; transaction volume is off 57 percent this year, which is a somewhat smaller decline than the 75 percent drop experienced by the office and retail sectors. The big question is, how will the market shift once liquidity returns? Jones Lang LaSalle speculates that the most active buyers of industrial properties will be institutional investors, which will look for safety in the form of core assets located in primary markets.