donedeals-3: U.S. Industrial Market First Look: 2010-Q3 from Grubb & Ellis

Sunday, October 24, 2010

U.S. Industrial Market First Look: 2010-Q3 from Grubb & Ellis

SANTA ANA, CA--Grubb & Ellis Co. senior vice president and chief economist Bob Bach (top right photo) presents his U.S. Industrial Market First Look: 2010-Q3:

· On the heels of a strong performance in the second quarter, the market took a breather in the third quarter as the vacancy rate fell by just 10 basis points to end the quarter at 10.5 percent. Vacancy, though below its recent peak of 10.9 percent in the first quarter, remains elevated.

· Net absorption plunged from a revised 19.9 million square feet in the second quarter to a slim 2.4 million square feet in the third quarter.

· Only 2.0 million square feet of new space was delivered in the third quarter, a little over half of it speculative. Projects still under construction at the end of the quarter totaled 13.2 million square feet, of which just 3.2 million square feet was speculative. Spec construction will be minimal until the market firms.

· The average asking rental rate for all types of industrial space available at the end of the third quarter was $5.30 per square foot per year triple net, a decline of 0.9 percent from the second quarter and 4.5 percent from the year-ago quarter. Rates for available space ended the quarter at $5.08 for general industrial (primarily manufacturing), $4.26 for warehouse-distribution and $9.23 for R&D/flex. Over the past four quarters, the average rates slipped by 6.8 percent for general industrial, 4.6 percent for warehouse-distribution and 5.2 percent for R&D/flex.

Forecast

In our Industrial First Look email released at the end of the second quarter, we warned that the market was “not out of the woods by a long shot” despite the strong second quarter performance.

We said, “The sluggish economy raises the possibility that the industrial recovery could falter in the second half of 2010.” That appears to be happening.

Second quarter activity most likely was fueled by pent-up demand. According to the Institute for Supply Management’s Purchasing Managers Index, the manufacturing sector continues to expand but more slowly than in the spring, and other indicators such as industrial production point to further softening.

The Federal Reserve’s plan to implement a second round of quantitative easing (QE2) is causing the dollar to weaken, which should make U.S. exports more competitive. Also on the positive side, retail sales appear to be firming modestly, which should put a floor under inventory demand.

Overall, slow economic growth is expected to constrain the pace of the industrial market recovery, though the recovery should remain intact.