March 6, 2009

By George Ratiu, Research Economist

Industrial real estate is experiencing a contraction due to shrinking demand and corresponding drop in production and warehousing needs. Most major indicators of industrial activity are in free-fall. In January, industrial production declined 1.8 percent, following an equally significant 2.0 percent drop in December. On a year-over-year basis, industrial production is down 10.0 percent. Manufacturing production, a major contributor to the industrial index, plunged 12.9 percent on a yearly basis, driven by sharp decline in motor vehicle and parts production.

In addition, consumer goods production declined 1.8 percent in January, and 7.9 percent from January 2008. With consumers in full retreat, manufacturers are cutting back on production. For the month, consumer durable goods took a sharp drop of 10.5 percent-reflecting the pull-back in automotive production. Other categories of consumer goods production that declined are home electronics (down 1.3%), appliances, furniture, and carpeting (down 2.3%), clothing (down 3.3%), chemical products (down 1.1%), and paper products (down 1.6%).

The situation is similar in other sectors like business equipment, where production dropped 3.7 percent in January. Adding to the overall shrinking of market activity, production of industrial equipment fell 3.0 percent, while transit equipment was down 11.7 percent. Construction also continued showing signs of weakness, with construction supply production down 3.4 percent. The only major groups to register positive changes were utilities, driven by lower-than-average temperatures, and defense and space equipment production, which increased 1.4 percent in January.

With significant changes in production, the industrial sector is experiencing painful job cuts. In January, industrial employment declined 7.9 percent, the 24th consecutive monthly decline. Manufacturing and construction sustained the bulk of the losses, shrinking 7.5 percent and 10.0 percent for the month, respectively. With economic activity continuing to decline for the remainder of the year, job losses are likely to continue mounting.

In this environment of broad-based contraction, it is no surprise that demand for industrial space, including warehouses continues to retreat. Net absorption spent all of 2008 in negative territory. With the prospects ahead dim, absorption in 2009 is expected to shrink even more, reaching negative 150 million square feet by year-end. The pace of new completions during 2008, totaling about 169 million square feet will not help.

 

Stemming from the influx of space on the market, the national industrial vacancy rate is expected to move to 11.4 percent in the first quarter 2009, a 16 basis-point jump from the first quarter 2008. The availability of industrial space is projected to continue its upward trajectory, and reach 12.3 percent in the fourth quarter 2009.

The impact of the economic downturn on the industrial sector is dispersed across the country. The Midwest is taking the heaviest toll, given its high concentration of manufacturing. However, markets affected by housing and consumer downturns-like Florida and Arizona-are also experiencing sharp declines in industrial space demand. Not surprisingly, the top five markets with the highest vacancy rates include Detroit (18.3%), Phoenix (16.3%), Columbus (16.0%) and Baltimore (15.0%).

Even inland markets that benefitted from increases in oil prices during 2007 and the first half of 2008 are feeling the stress of a shrinking market. Dallas, Austin, Chicago and Forth Worth are all posting vacancy rates at or higher than 12.0 percent for the first quarter 2009.

Markets with low availability rates are concentrated in the Western part of the country. Los Angeles continues to lead the list of low vacancies, at 5.7 percent for the quarter, followed by Tucson, at 7.4 percent.

Given the combination of rising availability and falling demand, rent growth for industrial space is expected to be significantly lower than last year. For the first quarter 2009, rent growth is expected to be -0.8 percent. For 2009, rent growth is expected to be down 4.1 percent. The prospects for the industrial sector remain challenging.

 

Lowest Industrial Vacancy Rates
2009.Q1 Estimates
Los Angeles, CA	5.7%
Tucson, AZ	7.4%
Salt Lake City, UT	7.4%
San Francisco, CA	8.0%
Kansas City, MO	8.0%
Houston, TX	8.0%
Portland, OR	8.3%
Seattle, WA	8.4%
Las Vegas, NV	8.5%
Long Island, NY	9.0%
National Average*	11.4%
Sources: NAR / TWR
* Not all markets are represented

 

 

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