The Expert: Growing Disparity In Regional Industrial Performance

This is not a typical economic downturn. Owing to structural effects from the housing bust and the correction in the global capital markets, its effects on the nation’s industrial markets are dispersed. While nearly all regions will surpass their previous availability-rate highs, the reasons can vary. Arizona and Texas are examples of regional economies that are declining for different reasons, one local and one global.The fallout in consumer-driven markets is pronounced most acutely in states like Arizona, those highly affected by the housing bubble. In Arizona, for example, the aggregate availability rate increased 520 basis points in 2008 to a high of 14.9 percent. This trend will continue for the next two years, the state’s availability rate hitting a historical maximum of 19.2 percent by year-end 2010. Consequently, Arizona will see greater decline in rents over this time period. Markets highly exposed to the subprime crisis have suffered greater-than-average declines in personal income and greater job loss rates. The reduction in consumer spending and business activity that came with the housing bubble burst has reduced the demand for industrial space drastically in these areas.Regions that the housing bust has less seriously impacted may instead have been affected by the correction in the global capital markets. Many interior areas were top performers over the past few years but are now plagued by a shrinking manufacturing sector and a slowdown in global demand for United States-made goods. When oil prices surged in 2008 and prompted a drive to cut transportation costs via supply-chain restructuring, demand for smaller distribution centers that were closer to transportation and population hubs increased, and many interior markets benefited. Texas’s availability rate, for example, increased 200 basis points to 11 percent during 2008. Now, the plunge in oil prices and decline in corporate profits is delaying this strategy, and these markets are feeling the effects. Increasing availability and contracting rent will continue in Texas over the next two years.Two very different regional economies, Arizona and Texas exhibit the relative weakness and susceptibility to economic contagion that all markets are experiencing during this recession. Certainly the fallout is more extreme for Arizona than for Texas. Thanks to its ties to global trade, the latter should rebound sooner once the recession is over.