Industrial Sector
Shows Limited Gains

Leasing of warehouse and other industrial real-estate space rose modestly in the second quarter, according to five research firms. But the growth was limited mostly to a few key markets that have fared better than others during the economic slowdown of recent years.

What's more, the firms conclude, a large amount of construction slated to be added to the market in the next two quarters, coupled with signs of slowing economic growth, threatens to postpone a robust recovery in leasing.

Tenants occupied an additional 46.3 million square feet of industrial space in the second quarter, compared with a gain of 16 million square feet in the first quarter and a loss of nine million square feet in the year-earlier quarter, according to Torto Wheaton Research, of Boston. The increase in so-called absorption, or net change in the amount of occupied space, reflects the improved economy in the second quarter, particularly in April and May.

Riverside-San Bernardino, Calif., and Los Angeles County, strong markets to begin with, posted the highest absorption numbers, at seven million and 5.3 million square feet, respectively, according to Grubb & Ellis Co., of Northbrook, Ill., which tracks 44 markets. Chicago and Dallas also posted strong gains.

Meanwhile, absorption fell in Kansas City, Mo./Kan., while Atlanta, northern and central New Jersey, and Greenville, S.C., registered negative absorption, according to Grubb & Ellis. Markets like these -- plus older, less modern industrial buildings across the country that aren't attracting tenants -- are bogging the overall market down, helping explain why the national vacancy rate has tended to move little in recent years.

The average vacancy rate for industrial properties in 51 major markets across the U.S. fell to 10.3% in the latest quarter from 10.4% in the first quarter and 10.5% in the year-earlier second quarter, according to Colliers International Inc., of Boston.

With vacancy rates so stubborn, industrial landlords still lack the power to raise rents. Rents for warehouse space, for example, fell to $5.41 a square foot on average nationally from $5.43 in the first quarter and $5.55 in the year-earlier quarter, said Laura Stone, managing research economist at Torto Wheaton Research.

One concern cited by almost all the firms was the amount of construction expected to come on line by the end of the year, especially as economic growth seems to have slowed. Research firm Reis Inc., of New York, forecasts total completions of industrial space will reach 54.8 million square feet this year, up 23% from 44.5 million in 2003.

The fear is that demand won't be strong enough to absorb that new stock, much less all the existing space. As a result, "don't expect the vacancy rate to come down this year," said Lloyd Lynford, chief executive of Reis. However, John W. Seiple Jr., president of Aurora, Colo.-based industrial real-estate investment trust ProLogis, said that construction, while up, is still less than in the late '90s -- about 2% of total inventory now, compared with more than 3% in the peak years of 1997 to 1999. "It's increasing, but in a disciplined fashion," he said.

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