Industrial Endurance

(U.S. industrial market conditions*)

Source: CoStar Group Inc.

By Rene Circ

The market has seen two years of demand following a very significant downturn, with interest widespread across the country but primarily concentrated in large distribution markets and especially in modern logistics buildings. But the annual numbers are deceiving: Quarterly performance has been less consistent. In fact, net absorption in the first quarter of 2012 neared recession territory.

Nonetheless, the national industrial real estate market has been recovering at a faster rate than the headline net absorption numbers would suggest. The lack of new supply, a rare event for industrial, has been of great help. In fact, in some quarters demolitions exceeded new additions. As a result, vacancy at the national level is firmly in single-digit territory. After peaking at 10.7 percent in 2010, the national vacancy rate has declined by 150 basis points. This declining trend will continue for another one to two years, after which new supply will catch up to demand.

Despite the more than two years of declining vacancies, rents are not yet on the rise. They are stable, holding at about 10 percent below their pre-recessionary peak. But there are still too many options being marketed—with the national availability rate nearly 500 basis points above vacancy—for landlords to be able to push rents on a large scale. They should accelerate in 2013, though, as the current rents are too low to justify construction in many markets and large blocks of space are in short supply.

—Rene Circ is director of research – industrial for CoStar Group Inc.