Industrial vacancies up

Real Estate Weekly, Feb 19, 2003

The national industrial vacancy rate continued its slow upward crawl in 2002, increasing by 122 million SF and elevating the national vacancy rate to 10.3%, its highest point since mid-year 1996. Virtually all major markets reported negative absorption, collectively recording 32.9 million SF of lost occupancy for the year. High tech and office/service/showroom product suffered the most dramatically, with 88.8% of the total negative absorption taking place in these property types in response to weak demand, according to Cushman & Wakefield, the global real estate services firm.

"While consumer spending has been healthy and inventory-to-sales ratios remain near historic lows, business spending has been minimal and a hindrance to any sustained industrial recovery," said Pamela Zoellner, senior managing director, Industrial Services, Cushman & Wakefield.

Zoellner said that lower amounts of new construction forecasted for 2003, combined with an increase in capital spending by business, will fuel a recovery.

* Absorption is the net change in occupied built space for a given time period, excluding sublease space. Construction completions were down by more than 45% in 2002, with only 72.6 million SF delivered in 2002, compared with 132.1 million SF in 2001. Forecasted deliveries for 2003 are expected to be even fewer, with only 47.1 million SF currently under construction.

Warehouse/distribution product accounted for more than two-thirds of all construction completions in 2002. Many major distribution markets, including Atlanta, Chicago, Central New Jersey and Miami, have seen built-to-suit completions outpace speculative construction.

National industrial leasing activity saw positive momentum in 2002, increasing 2%, or 5.2 million SF, from last year. Atlanta and Houston experienced the greatest increases in activity across 2002, while other major markets following this trend included Los Angeles, Dallas and New Jersey.

In the investment arena, industrial property sales were robust in 2002. Some of the largest portfolios were sold and purchased primarily by pension fund investors looking to offset stock market losses. Approximately 85.7 million SF of industrial product traded in 2002, 4 million SF more than the total in 2001. Private equity annual returns for industrial property was 5% as of the third quarter 2002, compared to 2.7% for office. This marks the second consecutive year that industrial property returns exceeded office. In 2001, the figures were 9.3% for industrial and 6.2% for office.