National Industrial Market
BOSTON
The industrial leasing market continued to be weak in the second quarter.
Absorption was negative 271,416 square feet.
There are, however, bright spots. The central submarket continues to display signs of stability, while the R & D;/flex industrial subtype continues to produce positive statistics.
Availability within most submarkets and property subtypes should be closely watched.
Expect industrial property markets to continue their same direction as in the first half of the year, with soft rents and higher than average vacancy levels.
Expect the market to start to correct itself by the beginning of 2005.
Economy
The local economy during the second quarter continued to hinder the stabilization of greater Boston’s industrial community. Manufacturing jobs both nationally and locally continue to be outsourced overseas, due in part to the cost-of-labor disparity between America and other countries.
While first quarter investment in the manufacturing sector was healthy, the second quarter produced mixed results. The latest national monthly statistics (May 2004) indicate that new orders for manufactured durable goods decreased by 1.6% in May and by 2.6% in April.
The local economy is closely mirroring national statistics with respect to industrial performance. Growth, however, does continue to occur in some industrial sectors. Companies such as Nypro of Clinton, Mass., recently opened a new $10 million factory, manufacturing medical devices, which is projected to employ 200 people over the next three years. A key to success within the Massachusetts industrial real estate market is to follow the trend in state manufacturing job development.
Forecast
There continues to be a general oversupply of industrial properties within greater Boston. Availability is still too high to allow for consistent rental growth.
The next few quarters will continue to return mixed results for the industrial real estate sector. R & D;/flex space will be a favored choice among prospective industrial space tenants due primarily to their high specification requirements for premises.
The sheer volume of available warehouse space will likely result in a few more months of slow to negative rental growth.
New construction remains consistent at 784,000 square feet in the pipeline. The availability of space has positively resulted in a cautionary approach to new construction efforts. The next quarter should produce similar results to the quarter just passed, with rents remaining soft but with economic indicators pointing toward growth in 2005.
CHICAGO
Companies in the area are beginning to benefit from the economic recovery taking hold in the Midwest. Many companies are reporting rising factory orders and the start of second shifts. As a result, the area is witnessing a boom in production.
Unfortunately this has not yet translated into new jobs, with about 109,100 or almost 19% of the area manufacturing job base having disappeared since June 2000.
Recent news from Wall Street relative to the nation’s industrial output has been mixed. The Federal Reserve reported strong 0.9% and 0.8% increases in May and April, respectively, but a disappointing decline of 0.3% in June,the biggest drop since April of last year.
This suggests that the manufacturing sector recovery may not be as strong as hoped. However, the drop in manufacturing production has been seen by many as a correction to “strong upward growth,” according to Dan Meckstroth of the Manufacturer’s Alliance/MAPI, quoted recently in the Wall Street Journal.
An independent survey of manufacturers conducted by the Federal Reserve Board points to a rising confidence factor in business conditions. The index rose from 29.9 in June to 36.5 in July.
Nevertheless, the Chicago Metropolitan industrial market remains strong, viable and poised to meet increasing demand in the months ahead, due in no small measure to its intermodal capability, superior transportation and logistical networks in the flourishing I-80, I-55 and I-39 corridors.
For the first time since the tech-bubble burst in 2000, local industrial markets appear to have achieved equilibrium with stable vacancy and lease rates.
Market Summary
The Chicago industrial market posted a strong quarter as U.S. markets began to show positive signs of stability. Second quarter 2004 vacancy closed at 9.9%, almost mirroring the national vacancy of 9.8% at the end of last quarter.
Because of Chicago’s strong industrial base, both the city and suburban markets offer quite an array of choices to owners, tenants, lessors or developers. The market continues to be a primary driver of the region’s commercial real estate markets with its strong and large base.
This quarter’s vacancy decreased 20 basis points from last quarter and the market witnessed positive net absorption of 3.5 million square feet. Availability rates have settled as well. Overall direct or sublease space available, regardless of whether occupied or vacant, topped out at 11.9% for the combined city and suburban markets.
Grubb & Ellis noted this quarter that overall sublease space available on the market held steady at nearly 5.8 million square feet,just 6% of overall available space for lease or sale this quarter.
Submarkets within the region coming out ahead with positive absorption levels are Central Will (Joliet and New Lenox area), Far North (Mundelein and Waukegan area), Fox Valley (Aurora and Naperville area) and South Cook (Bedford Park, Alsip and Bridgeview areas), all posting more than 500,000 square feet of absorbed space this quarter.
Several large transactions factor into these absorption figures. They are Form House Co. taking 220,000 square feet in Bedford Park, Michael’s and Arnold Logistics moving into a total of almost 1 million square feet in and around Joliet, Kraft occupying nearly 600,000 square feet in their new build-to-suit facility in Aurora and nearly 200,000 square feet by Hawley Partners LLC in Mundelein.
Asking rental rates remained stable this quarter. Overall asking net prices for warehouse and distribution, general industrial and R & D;/flex office space held at $4.28, $4.65 and $8.49 per square foot annually, respectively.
The city industrial markets continue, however, to list asking rental rates discounted from those of the suburbs. Landlords and owners within the city of Chicago and Cook County compete against lower taxes and more state-of-the-art facilities when compared to areas outside Cook County.
As both the city and industrial markets further their recovery, construction of new industrial space remains brisk. Almost 10 million square feet of projects are currently under construction, with 1.3 million square feet in the city and 7.9 million square feet in the suburban markets, compared to about 9 million square feet at the end of last quarter.
Forecast
The leading indicators for Chicago industrial space have been improving,dramatically in some cases. New manufacturing orders are robust, wholesale and retail sales are strong and business capital is expanding, indicating a healthy increase in the volume of goods flowing through corporate Chicago supply chains.
The wholesale inventory-to-sales ratio is low, and the dollar is weak, both of which should continue to boost domestic manufacturing activity, particularly in the Chicago market because of the region’s enormous size and importance within the U.S. economy.
OTHER MARKETS
Second quarter data show the industrial market is recovering primarily due to increased leasing activity levels for logistics, warehouse and distribution companies. As these businesses demand state-of- the-art space, they are driving the development market.
Net absorption levels are increasingly positive and vacancies are stable. With core economic fundamentals positive, the outlook for the area is cautiously optimistic.
Atlanta,Absorption was in the red and vacancy rose for the fifth consecutive quarter, yet construction remains strong in all major markets. The remainder of the year will be a repeat of 2003: a tenant’s market, slow recovery, minimal job growth and the hope for an upswing.
Broward County,Sluggish leasing activity pushed Q2 absorption into negative territory, though asking rents are moving higher. In Miramar, Keystone Property Trust paid $26 million for a 545,000-square-foot warehouse.
Cincinnati,Conditions changed little in the first half of 2004. Northern Kentucky has attracted several large lease deals. For-sale properties less than 50,000 square feet are in demand.
Cleveland,Absorption is positive and construction has surged to nearly 3 million square feet. However, an increase in steel prices will temper construction, making existing buildings more desirable. After years of standing on the sidelines, manufacturers have begun to take advantage of the strong tenant’s market.
Columbus,Vacancy dropped sharply in the second quarter, though it remains elevated. Construction totals 1.4 million square feet.
Des Moines,Logistics providers are beginning to consider Des Moines. There is increased tenant interest in 30,000 to 100,000-square-foot blocks of bulk warehouse.
Detroit,The market is showing marked improvement. Comerica’s Detroit area business activity index posted healthy increases.
Grand Rapids,A wave of newly signed leases in the second quarter will count as absorption in the third quarter as these companies take possession.
Greenville-Spartanburg,Vacancy has stabilized, and spec development is on the rise with 300,000 square feet under way. Hubbell Lighting will relocate its national headquarters to Greenville, investing $25 million in new office and industrial facilities.
Indianapolis,Investment activity is very strong. Vacancy and rental rates are stable.
Jacksonville,With very little new construction, absorption has been funneled to existing space. Larger distribution users are paying attention to northeast Florida.
Kansas City,With leasing still weak, user purchases have been driving the market.
Long Island,Developable industrial land is in short supply, keeping vacancy low and asking rents on the rise.
Louisville,First half sales and leasing activity is almost 50% ahead of last year. However, second-quarter vacancy rose slightly and absorption was negative, with the South, West/Southwest and Bullitt County submarkets taking the hardest hits. Anticipating stronger demand, developers are eyeing major land plays.
Miami,Three properties totaling almost 3 million square feet traded for more than $141 million during the quarter.
Milwaukee,HSA Commercial Real Estate and Morgan Realty Partners bought a 10-building portfolio in Brown Deer Business Park from TIAA-CREF for more than $25 million.
Minneapolis,Vacancy has begun to stabilize as construction slows and manufacturing activity increases.
Nashville,The market is getting a new Starbucks distribution center and major expansions by MidSouth Logistics, Rayovac and Nissan North America. Absorption was positive in the quarter and the vacancy rate declined to its lowest level in four years.
New Jersey,After five quarters of falling or stable vacancy, the market softened in the second quarter as corporate consolidations outpaced rising demand for large blocks of distribution space. Absorption was sharply negative in Northern New Jersey but moderately positive in the Central markets.
Palm Beach County,The Mecca site is the front-runner in the race for the Scripps Institute location, though a final decision is pending. Biotech company Dyadic International Inc. will expand into a 40,000-square-foot headquarters and lab space in Abacoa, where Scripps will be housed temporarily.
Philadelphia,Of the negative 540,000 square feet of absorption recorded in the quarter, 442,000 square feet were in a single warehouse. Build-to-suit projects represent the bulk of space under construction, including a 318,000-square-foot distribution facility for Electronics Boutique in Sadsbury Township.
Pittsburgh,Inquiries, tours and transactions increased in the second quarter. Investors aggressively pursued product, tenants evaluated their limited options and small users sought buildings to purchase. Once again, the Northwest submarket was the healthiest.
Raleigh-Durham,Large users are opting to construct new buildings rather than lease existing space, pushing up vacancy. Another round of layoffs and closings led to a sixth consecutive quarter of negative absorption.
Richmond,Infineon Technologies announced a huge investment in its Henrico computer chip plant, which will create several hundred new high-paying jobs.
St. Louis,Absorption was healthy in the quarter, led by the metro east submarket where Hershey’s occupied a 1.1 million-square-foot building in the Gateway Commerce Center.
South Bend,Absorption was positive in the second quarter. Lease rates for warehouse-distribution space remain competitive.
Washington, D.C.,Northern Virginia’s vacancy rate decreased by a full percentage point during the quarter. The R & D-flex; market has started to tighten.
Wichita,Unemployment is making a slow turn with aircraft manufacturers recalling 700 laid-off workers and the Economic Development Coalition reporting 624 new jobs year-to-date through May. Lease rates are sliding upward for higher quality space.
