CHICAGO
When looking at the Chicago metropolitan industrial market strictly by the numbers, second-quarter activity levels showed a significant improvement over those of the first quarter. Absorption, while still negative, was much improved; the vacancy-rate increase slowed, less space was in the construction pipeline, and net asking rents actually showed a slight increase. In spite of these “positives,” the market remains slow, particularly compared with the same period one year ago. There is no question that transactions continue to make their way through the process. That process, however, is taking longer as entrepreneurs and corporate real estate professionals carefully weigh economic conditions and their companies’ business plans to determine whether to move forward with transactions. Many of those businesses, which one year ago may have taken a more aggressive stance and either expanded their space or acquired buildings, now are taking a more cautious, wait-and-see approach. The 827,151 square feet of negative absorption in the suburban industrial market during the first quarter was a substantial improvement from the first quarter, when absorption was negative by almost 3.2 million square feet. Still, year-to-date absorption was just more than negative 4.0 million square feet. By comparison, at mid-year 2000, absorption, which typically peaks during the second and third quarters, was 8.7 million square feet. During the second quarter, seven of the 15 suburban industrial markets had positive absorption, compared with four in the first quarter. For the quarter and for the year, the Fox Valley and O’Hare markets remained at the opposite ends of the spectrum. In the Fox Valley, almost 500,000 square feet of space was absorbed during the quarter, bringing the year-to-date level to almost 345,000 square feet. In contrast, more than 900,000 square feet of negative absorption was recorded in the O’Hare market. This pushed year-to-date absorption to almost negative 2.2 million square feet there.
MIDWEST
Atlanta:
The 785,000 square feet of absorption during the second quarter was less than half of the amount absorbed during the previous quarter and demonstrated the effect of the economic slowdown on Atlanta’s industrial market. According to John Phelps of Grubb & Ellis, “Atlanta’s slowdown is a market adjustment caused by corporate America’s drive for an upswing in earnings.” This corporate drive is producing changes in the industrial market, such as more technology-enhanced efficiency in manufacturing and distribution. Phelps states, “these market adjustments require a turnaround time and usually last 18 to 24 months, and the absorption of sublease space (now totaling nearly 4.4 million square feet) will lead the recovery.” By mid-year there were more than 12 million square feet under construction, an increase of 1.4 million square feet from the first quarter. South Atlanta led all submarkets with 5.8 million square feet of construction activity, followed by Northeast construction totaling 3.5 million square feet. The vacancy rate increased to 10.1% during the quarter, up nearly a percentage point from the first quarter. The three largest industrial markets,Northeast, South Atlanta and Fulton Industrial,all reported vacancy rates from 10.1% to 11.1%, and these increases in vacancy have encouraged landlords to offer incentives to lure and retain tenants. According to John Crawford of Grubb & Ellis, while there haven’t been any noticeable drops in asking rental rates, landlords were offering up to two months in free rent to make a deal.
Charlotte:
The industrial market has not seen much effect from the technology fallout because Charlotte is not very “dot-com” heavy, even though Charlotte has quite a number of inbound call centers.
Cincinnati:
It is a buyer’s market in the Greater Cincinnati/Northern Kentucky area, with an influx of available industrial facilities and a decrease in activity opening up plenty of below-market opportunities for tenant prospects. Local industrial REITS are feeling the vacancy pains along with the smaller office-warehouse owner-investor. However, the market is showing very preliminary signs of revival, with reentry inquiries from core small to mid size manufacturers.
Detroit:
The market is starting to feel the effects of the downturn in the economy in the Detroit Metro Area. The industrial vacancy rate rose from 4.4% in the first quarter to the second-quarter rate of 7.3%. The upside this quarter was the 4.5% increase in the average warehouse-manufacturing rental, to $5.17 a square foot annually.
Grand Rapids:
The continued slowdown in the automotive market and office furniture industries is causing many warehouse-distribution spaces to come back on the market. The only positive note is the slowdown in construction. If this trend were to reverse, the average asking lease rate and vacancy rate would take hits.
Greenville:
Roughly 5,000 jobs in upstate South Carolina have been lost in 2001 due to textile mill closings. On the positive side, industrial activity has increased in the past 60 days. Speculative industrial construction has ceased, which was needed to allow time for existing inventory to be absorbed.
Kansas City:
Leasing and sale activity for industrial property through the first six months of 2001 continued to slow from the pace of the previous years. Activity is “spotty,” with the majority of transactions centered within Executive Park and Johnson County. Local market experts concur that although the local economy continues to be stable, there is caution among the decision-makers regarding the pending real estate decisions.
Long Island:
Thanks to the pent-up demand and continued strength of the Long Island economy, the industrial market has been the least affected. This demand has been maintained through limiting new construction, especially speculative development. Asking prices remain high for existing space, which has been a boon for the build-to-suit market, especially in the Economic Development Zones.
Louisville:
The Bullitt County submarket was the industrial hot spot during the second quarter, with activity and net absorption of 700,000 square feet,51% of the Louisville market’s sales and leasing activity and 75% of the entire market’s net absorption. Sales and leasing activity of 1,364,967 square feet helped the Louisville market experience 938,666 square feet of absorption, its first positive absorption in three quarters. The overall vacancy rate for the Louisville Industrial Market only increased 0.2 percentage points despite 585,000 square feet of construction completions.
Nashville:
Nearly 3 million square feet of distribution space was delivered in the first half of 2001. Rental rates will continue to soften from sublease space and vacant second- and third-generation space.
New Jersey:
By mid-2001, slowing leasing velocity and new construction had contributed to the overall industrial availability rate increasing to nearly 4%, compared with 2.9% at the end of last year. There continues to be a dramatic discrepancy between asking rental rates in Northern and Central New Jersey. Industrial users willing to expand their geographic preferences to include Central New Jersey are finding several opportunities to lease space in warehouses at rental rates that are more than $1.00 per square-foot lower than their neighbors to the North. The Central New Jersey average asking rental rate was unchanged from early 2001 at $4.71 per square-foot, compared to $5.85 per square-foot in Northern New Jersey.
Omaha:
Lease rates for industrial product are expected to remain static through the last half of 2001. In the past year, industrial growth has been relatively flat, with low to moderate absorption. Flex space has garnered the largest share of limited activity in the industrial sector of the Omaha market.
Orlando:
Vacancies reached their highest level (10.2%) since Grubb & Ellis began tracking the market in 1999. Leasing has slowed and availability has increased, but construction has slowed, too, keeping the market in balance. Owner-built and build-to-suit development will keep the market active and in balance through the remainder of the year.
Philadelphia:
The Greater Philadelphia Industrial Market began to feel the fallout of the nation’s economy during the second quarter, but with the help of two large preleased projects coming online, the overall market stayed out of the red. The 633,000-square-foot BJ’s Wholesale warehouse, in Burlington, N.J., was completed in May, and the 1,015,000-square-foot TJ Maxx facility, adjacent to the North-East Philadelphia Airport, was completed in June. Each submarket’s activity varied quite drastically, with Philadelphia County absorbing about the same amount of space Camden County released into the market. Chester, Gloucester and Philadelphia Counties reported the tightest markets, all with vacancy rates less than 4%. Average asking lease rates remained steady throughout the region topping out at $5.97 per square foot annually, triple-net, in Montgomery County. The Federal Reserve District of Philadelphia recently reported that manufacturing activity continued to decline during the second quarter, but most manufacturers expected steady to slight increases in orders over the next six months. The industrial real estate market will most likely remain stagnant over the next quarter as manufacturers await the movement of our nation’s economy.
Pittsburgh:
The overall availability rate decreased during the second quarter, from 18.5% to 17.7%, despite soft business conditions and a slow real estate market. The availability rate for Class A and B product dropped a tick, from 5.9% to 5.8%, and the market for quality space remains competitive. Pittsburgh continues to maintain a large inventory of Class C and below properties. Though vacancy rose during the quarter, the Northwest remains the most popular and active suburban communities, and new and existing product should be absorbed quickly.
Richmond:
Overall vacancy increased to 11.8% due to some large buildings coming back on the market. The average asking lease rate dropped dramatically in the warehouse/distribution category, where the vacancy rate exceeds 15%. Sales activity continues to outpace leasing and consists primarily of local companies taking advantage of attractive interest rates and a good supply of product.
St. Louis:
Although the vacancy rate has showed a slight increase from the first quarter of 2001, new industrial construction continues to increase. More than 2.2 million square feet of new product will come online in the next few quarters: 546,000 square feet of service centers and 1.6 million square feet of warehouse-distribution centers. Nearly 1 million square feet of warehouse-distribution space was under construction in the newest submarket, Gateway, in Madison, Ill. Gateway Commerce Center is one of the premier transportation and distribution center parks in the Midwest. Proctor & Gamble and Dial will have their warehouses at the new center.
Washington, D.C.:
Perhaps most surprising about the mid-year flex/industrial numbers is the fact that Loudoun County has yet to post negative demand in 2001. Despite Loudoun County’s vacancy rate for flex properties soaring to more than 30%, second-quarter net absorption measured a positive 233,000 square feet, more than five times the level seen in the first three months of the year. Some 1.35 million square feet of flex space delivered during the second quarter in Loudoun County, and of this, only a quarter of the space was pre-leased upon delivery, but demand was still positive due to the relatively small number of tenants downsizing or leaving the existing inventory. In Northern Virginia, eight buildings totaling 950,000 square feet delivered entirely vacant. Under construction at the mid-year mark are another 11 flex buildings totaling almost 800,000 square feet with no pre-leasing in place. In keeping with national trends, the Washington, D.C., metro area industrial market survived the second quarter undamaged, posting flat demand and nominal increases in asking rents. With this more easily and quickly constructed building type, developers can afford to be more responsive to market demands and have consistently been less inclined to speculate on future demand. Hardly any groundbreaking is expected in the third quarter, although several site plans have been approved, and in some cases construction has begun, but was stopped short after completion of foundation work. n
