The News: Heartland Markets Lead Overachievers

Hundreds or thousands of miles from the nation’s powerful coastal ports, second-tier industrial markets sometimes seem overlooked. But a handful of locations, most in the nation’s heartland, held their ground or improved occupancy during the first quarter compared to the same period of 2008.In 13 of 53 markets served by Colliers International affiliates, year-over-year industrial vacancy held steady or improved. Leading the list is Little Rock, Ark., which enjoyed the biggest vacancy drop of any industrial market surveyed by Colliers, from 17.2 percent to 10.6 percent. Cleveland trimmed its rate from 8.1 percent to 7.5 percent. In Memphis, vacancy dropped from 14.7 percent to 12.9 percent. Also registering declines or nearly identical vacancy were Columbus, Detroit, Indianapolis, St. Louis, Minneapolis, Louisville, Memphis and Kansas City. Joining those markets were three others close to the East and West coasts: Hartford, Charlotte, N.C., and Bakersfield, Calif., where vacancy edged up only 10 basis points during the year.By contrast, 40 industrial markets scored higher vacancy rates during the first quarter than they did during the same period of 2008. In the San Francisco Bay peninsula, vacancy rose from 5.3 percent to 7.9 percent year over year. Houston sustained a 2.3 percent increase that brought vacancy to 6.8 percent. Northern New Jersey, too, ended the quarter at 6.8 percent, 1 percent higher than the first quarter of 2008.Ross Moore, executive vice president & director of market and economic research for Colliers, speculated that several economic trends might be favoring some heartland markets. Rising land and shipping costs could be causing companies to think twice about ordering goods made in offshore factories, despite low labor costs. “I don’t think that people are looking at manufacturing outside the U.S. as positively as they were,” he said. The “buy American” incentives contained in the federal economic stimulus package could further boost domestic manufacturing and distribution facilities.Researchers also point out that a few major deals make a big difference for a midsize market. In the St. Louis area, for example, a pair of deals totaling 272,000 square feet accounted for the bulk of the market’s 306,000 square feet of positive absorption during the first quarter. “Without them, it would have been a wash,” said Keith Zeff, director of research for Colliers Turley Martin Tucker’s local office. And though flat or improving occupancy indicates steady demand, it does not necessarily translate to price increases; average asking rents in the market dipped from $6.54 a year ago to $6.31 during the first quarter.Some senior executives suggest that the nature of these markets is enabling occupancy to hold its own. “The second-tier markets tend not to get as overbuilt,” explained Jim Connor, executive vice president for Duke Realty Corp.’s Midwest region. “(Thus, tenants) don’t have as many options when the market goes south,” he noted. A tenant searching for a 500,000-square-foot block in a smaller market would likely have only a handful of choices. “If you go to Chicago or Dallas, I guarantee there are no less than 15 available.”