The Expert: Warehouse Rents Feel the Pain

The national industrial market is still feeling the effects of continued sluggishness in import growth, the U.S. recession and worldwide economic slowdown. While gross domestic product is contracting, sluggish consumer activity continues to exert downward pressure on the demand for distribution space. The tightening of the credit markets is making financing of construction projects much more difficult; as a result, we expect new supply levels to be considerably lower in the coming quarters. Lower levels of supply will prevent excessive increases in availability rates, with the exception of certain markets, such as Riverside. In addition, while we continue to expect weak rent performance in the coming quarters, the slowdown in new construction will prevent rents from declining to the extent that they did during the 2001 recession.Despite weakening fundamentals, the impact of the current downturn on the industrial sector has not yet reached the depths of previous downturns. Absorption during 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. With financing issues keeping rates of new supply well below historical averages, our national TW Warehouse Rent Index did contract for the second consecutive quarter, declining by 0.7 percent to $5.96. Forty of the 58 markets for which CBRE Torto Wheaton Research calculates the index experienced declines in rent levels. Markets overexposed to subprime lending, such as those in California and Florida, continued to experience rent declines. Rents in Riverside, Tampa, Phoenix and West Palm Beach have fallen for at least two consecutive quarters and are expected to remain weak in the coming quarters.Although our overall outlook is more bearish, that is not to say that some well-positioned markets will not outperform the nation in 2009. Looking at our economic rent measure, which combines nominal rent growth with changes in occupancy, a number of inland markets—including Raleigh, Atlanta and Memphis—will continue to exhibit strength, given their central locations for distribution centers and being a day’s drive to several major markets. Additional markets where economic rent gains should outperform include larger markets like Houston and New York City, as well as some supply-contained high-tech markets like San Francisco and San Jose.