The News: Vacancy Rises, but Bargain Rates May Drive Leasing

Continued weakness in the economy and a surplus of 2009 deliveries will translate to an increased rise in nationwide industrial vacancy, according to a first-quarter report from Cushman & Wakefield Inc.U.S. vacancy rose to 9 percent from 8.3 percent in the fourth quarter and 7.2 percent at the end of the first quarter of 2008. The current rate is the highest in four years but still falls below the decade-high mark of 10.1 percent. The increase occurred throughout the country except the San Francisco peninsula and suburban Maryland. In addition, the number of industrial regions with a vacancy rate of 10 percent or higher doubled over the past year. The largest year-over-year increases occurred in California’s Inland Empire, with 6.7 percent; Phoenix, with 4.2 percent; and Central and Northern New Jersey, each at 3.7 percent.Net absorption measured negative 52.1 million square feet, down from the 2008 year-end total of 6.4 million square feet and down from positive 918,000 square feet at the end of the first quarter of 2008.Leasing activity also decreased significantly, falling 28 percent from 67.2 million square feet during the first quarter of 2008 to 48.4 million square feet in this year’s first quarter. Year-over-year, only three markets experienced an increase in leasing transactions: Dallas/Fort Worth at 648,053 square feet, Baltimore at 632,792 and Phoenix at 186,701. Another barometer of market activity, user sales, totaled 6.9 million square feet, less than half of the transactions recorded during last year’s first quarter.Investment sales activity also slowed noticeably, owing largely to the continued deep freeze in the capital markets. Investment transactions totaled only 8.5 million square feet, just one-fifth of the activity recorded during the first quarter of 2008. Chicago, the Inland Empire and Phoenix reported a significant drop in sales compared with this time last year, as volume declined 9.5 million square feet, 6.2 million square feet and 4.3 million square feet, respectively.Construction completions, at 24.3 million square feet, were relatively consistent with the activity reported in the first quarter of last year. An additional 58.9 million square feet will be delivered to the U.S. market this year, and the majority of these buildings have no pre-leasing. But, the amount of space under construction has dropped drastically, from 98 million square feet in the first quarter of last year to 32.2 million square feet this year. That is the lowest amount of development since 1995, when the economy was emerging from a slump. That means, however, that when demand returns, there will not be a great deal of new industrial square footage to meet many user requirements.The Cushman & Wakefield report forecasts that weak fundamentals should persist throughout the year, and industrial users are likely to take advantage of lower lease rates and landlord concessions as they implement plans to lower costs and improve efficiency.