DENVER
At the end of 2003, Denver’s industrial sector had a great deal of momentum and it appeared the market would soon recover. However, both the national and local economies stalled mid-2004 and a strong recovery never materialized.
Denver’s industrial market is again on the rise this year with increased activity. Net absorption has returned to the positive side of the ledger for the first time in two years and vacancy levels slowly dropped last year.
Tenant demand increased as did the size of deals during the second half of the year. Once companies feel confident in the overall economy and in their industries specifically, we believe they will move forward with expansion and relocation plans, which will translate into a strong market this year.
Newer, more functional space will lease up rapidly once the market gains traction, as this is an existing trend that we expect to continue.
Unfortunately, the vast amount of second and third generation space will continue to drag down the rest of the market. About 80% of available industrial space is in buildings five years or older.
The current gap in rental rates between these two classes of industrial space is nearly $2 per square foot per year and we expect this gap to widen considerably.
If a shortage of quality space materializes, new speculative construction may ramp up. ProLogis, Lauth, Majestic and Catellus are major developers that have large industrial parks ready for development. Panattoni also is positioning itself to increase its market presence.
Construction was constrained last year, with only 1.6 million square feet finished. But if market conditions warrant, there could be a rapid rise in new construction, particularly in the I-70/E-470 area.
The demand for industrial zoned properties with yard space also continues to be strong. Strategic infill sites with good access to major arterials are a great buy for developers and owner-users.
Once again, the industrial sector is poised for a sustained recovery as soon as economic indicators, such as increased manufacturing, consumer confidence and unemployment rebound.
The market has strong fundamentals and momentum and isn’t expected to sputter again. Several 300,000-square-foot tenants are surveying the market; it looks like these transactions will become reality in early 2005, propelling the industrial market’s recovery.
Absorption is positive after two years of losses, and vacancy is declining,all indicators are headed in the right direction for the industrial market.
PHOENIX
The industrial market was consistently strong last year and should have a record performance in 2005. The demand for industrial space in metro Phoenix will be positively impacted by the growing local economy. Several out-of-state businesses, mostly from California, relocated to the Valley last year to be a part of its favorable and inexpensive business climate.
With the continuance of a stable economy and positive market consistencies, local and out-of-state businesses will gain even more confidence in the industrial market.
California manufacturing and distribution companies will continue to migrate into metro Phoenix, particularly the opportunistic Southwest Valley, to escape high operating expenses, labor costs and taxes.
Metro Phoenix, touted as one of the most affordable housing markets in the Western U.S., continues to experience a significant housing boom as population growth spikes.
As a result of the housing boom, the Valley will be a prime location for homebuilding, housing supply, and furniture distribution companies this year and beyond. The West Valley, which will see the most housing growth, will see the highest levels of demand from these businesses.
Demand will continue to rise this year, particularly for small to midsize general industrial space and for-sale properties. Industrial sales activity should continue at the same pace as last year. Larger, bulk distribution and big high-tech space will continue to languish but will have a stronger year in 2005.
The strained manufacturing market should begin a modest recovery this year. That will increase the amount of leasing and sales activity in mid to large-size buildings.
The costs of steel, concrete and lumber are steadily on the rise. As construction costs spiral upward, construction activity will be somewhat limited. However, the West Valley will see ongoing activity and will host the majority of new industrial developments this year.
Preleasing and build-to-suit developments will become more popular. The redevelopment of older industrial buildings in infill locales, such as the Sky Harbor submarket, also will become a bigger trend this year.
Rental rates will increase and concessions will decrease to reflect the higher costs of land and construction.
Small to midsize space should see the most notable rental rate jumps in 2005.
In summary, this will be a solid year for the metro Phoenix industrial market. With many economic indicators stimulating industrial demand, net absorption will reach impressive levels and vacancy will drift down into the single digits.
Tenants and landlords alike will have good reason to have confidence in the market. Affordable housing and lower business costs will continue to bring out-of-state manufacturing and distribution companies to metro Phoenix, which will strengthen the industrial market this year.
RENO
Increased demand and a flurry of market activity generated big increases in net absorption and set up 2005 for a construction boom.
Mediocre performance in 2002 and 2003 paved the way for strong numbers last year. Total activity in the Reno market was more than 5 million square feet with a mix of existing business expansions and new companies moving into northern Nevada.
Developers remain cautious with 750,000 square feet of new speculative construction built. Most of the square footage added was flex space, built for sale, with very little to be held and leased.
The sale prices of these properties, which are primarily condo units, have been impressive with numbers as high as $125 per square foot paid for shell only.
Build-to-suit numbers remained low at 580,000 square feet; however 1.5 million square feet are in various stages of negotiation just prior to the end of the year. Net absorption increased nearly 150% versus the previous year to 2.4 million square feet, due in part to existing business expansions, and commitments from new companies such as James Hardy and its new 450,000-square-foot manufacturing facility.
The northern Nevada industrial market includes the valleys north of Reno/Sparks (central city) and 30 miles east of Sparks along the I-80 corridor to Fernley. Land prices inside the central city have increased dramatically, $8 to $9.50 per square foot, as the supply of industrial zoned property continues to shrink. However, an ample supply of industrial zoned land exists in the suburban markets, priced from $1.50 to $2.50 per square foot.
Little reduction in the vacancy rate kept lease rates stable. But as the vacancy rate falls, demand will revitalize interest in big-box speculative construction.
Developers will continue to keep an eye on construction costs, particularly the cost of cement, steel and labor, but lower vacancy and demand should push lease rates up 5% to 7%, covering the increased construction costs.
Investors drove capitalization rates down to the 8% to 8.5% range. New businesses migrating to Nevada from California and expansions from the upper Midwest and East will continue to fuel growth.
Nevada has no corporate or personal income tax and has a history of being a business-friendly state and one of the fastest growing in the nation.
SAN ANTONIO
San Antonio’s industrial leasing market will strengthen in 2005 as vacancy subsides, rents moderately increase and construction activity moves in sync with demand.
Although the San Antonio industrial market experienced steady leasing activity in 2004, a large drop in yearly absorption occurred in the area due primarily to the relocation of Levi Strauss and AutoZone, which left behind a combined 563,856 square feet of vacant space.
Consequently, the Alamo City’s vacancy slightly increased to 13.5% as a result of negative absorption at standard industrial properties coupled with new space deliveries outpacing demand in the R & D;/flex market.
However, Maxim Integrated Products helped offset some of those losses by finally moving into its 330,000-square-foot chip wafer plant last year. With the new chipmaker’s arrival to San Antonio, it certainly boosts the local manufacturing sector, which has caused most of the decline in the past two years.
Meanwhile, the R & D;/flex market also helped mitigate the losses with more than 200,000 square feet of positive absorption mostly coming from new space deliveries.
With speculative construction picking up and current projects totaling 563,000 square feet, developers are gearing up for the anticipated growth from Toyota. The recovery of the Northeast and Northwest submarkets is essential to the city, as they generally lead any recovery of the industrial market.
In the year ahead, most development likely will be user-driven, which will allow developers to offer build-to-suit facilities to suppliers interested in building new space.
SEATTLE
Demand for industrial space has returned as the Puget Sound economy improves. However, new construction will exceed demand and vacancy is set to increase this year.
Long-awaited construction activity has returned in the Puget Sound industrial market fueled by an expected demand for industrial space. In the southern end of the Kent Valley, developers have dramatically increased construction.
In Sumner and Fife, developers such as Knapp Development, Tarragon Development, Opus Northwest, Northwest Building, LLC and Panattoni Development are building major speculative projects. Some 1.5 million square feet of distribution buildings are set to be finished by these developers in early 2005.
Fueling this speculative development is the lack of existing big box spaces larger than 200,000 square feet. By the same token, there remains a large inventory of spaces from 50,000 to 150,000 square feet. While there are several large tenants looking for space, developers will be competing for the same tenants and some buildings will deliver with significant vacancy.
Vacancy rates will rise as the new space hits the market. Once tenants and owner/users emerge to occupy these projects, more buildings will go up and development opportunities will then move further south.
Geographic constraints have limited the availability of developable land from South Snohomish County all the way to Tacoma.
As developers begin to run out of land, more development opportunities will be found in Thurston County, Dupont and southern Washington as large parcels of land slowly disappear from Sumner, Puyallup, Fife and Frederickson.
The Snohomish County markets will continue to be driven by demand from Boeing, specifically the new 7E7 that will be assembled at the Everett plant.
And because of the difficult traffic situations in the Puget Sound area, many regional and national tenants in South King County will continue to look at opening additional facilities in Snohomish County to help the distribution process.
A particularly significant and interesting land deal is in progress in the Northend market where a Florida-based racetrack developer recently announced plans to build a Nascar racetrack north of Marysville.
The requirement will take up 850 acres of developable land in the market, much of it industrially zoned. However, it will be a few years until a deal is completed as the Snohomish County community will debate its merit for the foreseeable future.
On the whole, rents and concessions will continue to favor tenants for most of 2005. Competition among developers with speculative projects to land the big user will lead to very aggressive deals. Vacancy rates will increase in 2005 as demand will not meet production.
