Skip navigation

Encouraging Signs Begin to Emerge

After a three-year malaise, the industrial market appears to have turned a corner, according to developers and owners who report that corporate expansion is on the rise. The Big Three markets of northern New Jersey, suburban Chicago and the Inland Empire near Los Angeles are certain to lead the recovery, though smaller cities such as Atlanta and Dallas are likely to see robust construction activity in 2004.

Clouding the prospects for the pace of recovery, however, is conflicting research data, which ranges from sanguine to gloomy. Cushman & Wakefield, for example, reports that the nationwide vacancy rate peaked at 10.1% in the second quarter of 2003, before falling to 9.9% at the end of the third quarter.

However, Torto Wheaton Research pegs the current vacancy rate at 11.7% — up from 6.6% in 2000 — and forecasts a continuing rise to a peak of 12.5% by the third quarter of 2004. Moreover, Torto projects rents to fall 3.2% in 2003, 2.4% in 2004 and 1.3% in 2005 (see chart).

“We don't see rents turning positive until 2006, and even then they'll only grow by 1%,” says Jon Southard, Torto's chief economist. “Of the industrial buildings built since 2000 nationally, there is a 24% vacancy rate, which means a lot of spec space is going unused. That tells you this market still faces a lot of headwind.”

Meanwhile, construction activity during this choppy economic recovery has continued at a healthy clip. Cushman & Wakefield reports that in the third quarter of this year 48.9 million sq. ft. of industrial product was under construction, up more than 20% from the 40.5 million sq. ft. during the same period in 2002.

Optimists Outnumber Skeptics

Most developers and investors believe that Torto has been too pessimistic, and are laying plans for significant building in the coming months.

“The economy is definitely turning. We see clients who are expanding, clients who want to enter new markets,” says Henry Gregory Jr., president and CEO of Industrial Developments International (IDI). “Industrial real estate is an early indicator when an economic cycle turns. Corporations look at their distribution chain first when they're ready to grow again.”

IDI is hunting for property and tenants. The Atlanta-based company has signed a contract for more than 50 acres of land in Northern New Jersey and is hoping to launch a 500,000 sq. ft. speculative warehouse distribution center there next year. Another spec building of 300,000 sq. ft. is planned in Atlanta for next year.

IDI is not the only developer entering 2004 with renewed optimism. The Alter Group, based in Skokie, Ill., plans to break ground in early 2004 on two speculative warehouse buildings totaling 1.3 million sq. ft. around Fontana in California's Inland Empire.

“There has been 12 million sq. ft. of absorption this year in the Inland Empire. It's a market on fire,” says Patrick Gallagher, senior vice president, who adds that Alter is searching for development projects in New Jersey and around Philadelphia. “The national market is still sluggish, but there has been consistently good leasing activity in places like Chicago, Atlanta and Dallas,” Gallagher says.

Undaunted by the Torto Wheaton forecast, Chicago-based Orix Real Estate Equities Inc. has broken ground on a 660,000 sq. ft. spec building in suburban Romeoville as well as a 334,000 sq. ft. building at the Meadowlands Distribution Center in northern New Jersey.

“We've got a half-dozen proposals out right now to users looking for 400,000 sq. ft. or more. They're all serious players,” says Jonathan Malm, Orix's executive vice president of development. “If we don't have any political blow-ups, 2004 should be a solid year. Then 2005 could be a real break-out year.”

Market Drivers at Work

The industrial market is primarily being fueled by demand from consumer products and retail companies, says James Dieter, executive managing director of the North American industrial group at CB Richard Ellis, based in Chicago.

“Crate & Barrel just took 800,000 sq. ft. in central New Jersey, while Target took 1 million sq. ft. in Scranton, Pa. Wal-Mart and Home Depot and the other big-box merchants are all going to be active in 2004 as they work to sharpen their supply-chain logistics models,” he says.

Dieter sees a rash of investment by developers in land with an eye toward construction starts next year and beyond.

“Developers must have land for the next cycle. Those that don't have land will be at a huge disadvantage and stand to lose market share,” emphasizes Dieter. “The landholders will be ready to go when the bell rings, and it looks like that could occur very soon.”

TAGS: News
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.