The Expert: Interior Warehouse Markets Remain Bright Spots

The national industrial market experienced a third consecutive weak quarter from July through September. Availability increased 40 basis points to 10.7 percent, and negative absorption totaled 8.2 million square feet with 44.6 million square feet of new supply added. Despite weakening fundamentals, the downturn has not yet reached the depths of previous recessions. Absorption in the past three quarters has entered negative territory but not as deeply as in 2001 or 1991. Nor are we expecting declines to be as steep in the future. Industrial demand is expected to remain weak in the coming quarters, but the lack of lending activity will prevent severe supply-and-demand imbalances in many markets. Tightened credit markets are creating an inability to obtain financing for new construction projects and will keep new supply relatively low, which will help contain the same availability rate increases that were seen in the previous downturn.Many export-oriented markets; however, are still enjoying positive warehouse demand. Exports have taken off over the past couple of years, thanks to strong demand and a relatively weak U.S. dollar that has made American goods cheaper for foreign businesses and consumers. While the third-quarter economic release indicated a slight deceleration in export growth, exports are anticipated to maintain a better pace than imports. Many of these export-driven markets are located in interior areas of the country and are benefiting not only from greater export activity but also from increased intermodal and rail use as well as strong North American Free Trade Agreement traffic. Markets like Memphis, Las Vegas, Kansas City, Nashville, Atlanta and South Central Pennsylvania have continued to experience positive warehouse demand in 2008.Many of these markets—such as Atlanta, St. Louis and Indianapolis—should continue to experience positive warehouse demand over the coming year owing to stronger export activity combined with relatively low levels of construction. Many of these interior markets that are within a day’s drive from many large population centers continue to be attractive to retailers and logistics providers that seek to consolidate their operations closer to consumers.