Distribution market leads industrial property recovery

Real Estate Weekly, June 30, 2004

Marcus & Millichap Real Estate Investment Brokerage Company recently released its National Industrial Research Report, which indicates that, despite job losses, the industrial market has stabilized and is poised for growth with prices expected to continue to rise and warehouse distribution in strong demand.

"After two years of dismal performance, the industrial market appears to have turned the corner," states Harvey E. Green, Marcus & Millichap's president and CEO.

"The warehouse/distribution sector held steady last year as builders kept speculative construction to a minimum and absorption increased at a steady rate."

"The major distribution hubs of the nation are expected to register the most significant improvement in 2004, but continued gains in corporate profits will start to fuel demand for properties in nearly all markets by year end," comments Alan L. Pontius, national director of Marcus & Millichap's National Office and Industrial Properties Group.

"While investment activity is likely to remain slow due to limited for-sale inventory, there continues to be a large amount of capital available for placement in the industrial market, which will lead to further price increases this year."

The report also provides in-depth coverage of the Atlanta; Chicago; Dallas-Fort Worth; Houston; Riverside-San Bernardino, Calif.; Los Angeles; Northern New Jersey; and Phoenix industrial markets.

Following are some of the most significant aspects of the Industrial Research Report:

* Industrial jobs are returning in 2004.

The manufacturing sector is expected to continue shedding jobs in 2004, but the rate of loss is slowing. Gains in wholesale trade, transportation and warehousing will help offset some of the losses. The end result will be a gain of 50,000 industrial-based jobs in 2004.

* Development will decline this year. Completions will total 67 million square feet this year, down from 88 million square feet in 2003. Build-to-suits will account for the majority of new space.

* Absorption has begun to exceed new supply.

During the first half of 2004, absorption exceeded deliveries to the market, a trend that will extend through year end.

* Vacancy is declining and asking rents are expected to remain level.

Most markets have turned the corner on vacancy and will post improvement by year-end 2004. The overall vacancy rate is expected to decline by a total of 40 basis points this year, to 10 percent. Asking rents have stabilized but are not expected to rise as filling space is a priority among owners. Last year, asking rents declined by 4 percent, to $5.15 per square foot.

* Fundamentals have slipped, but returns have increased. Low mortgage rates are allowing investors to achieve better returns. Total returns increased by 8.2 percent in 2003, up from a gain of 6.7 percent the previous year.

* The investment outlook calls for slowing sales activity but rising prices, with warehouse/distribution in high demand.

* Northern New Jersey's industrial market fundamentals will improve further as companies continue to expand in one of the most strategic distribution locations in the Northeast.

Vacancy will drop to 9.9 percent and rents will hold steady at $7.20 per square foot during 2004. Small to mid-size buildings have generated the most buyer interest and seen a 14 percent price increase over last year with the median currently at $57 per square foot.