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Industrial Firms Tighten Belts

As consumers buy fewer goods, distributors devise new ways to cut warehouse costs.

It has been a rough year for major players on the nation's industrial fields. So rough, in fact, that new patterns are emerging to help companies scrimp as vacancy rates rise amid a slowdown in global trade and shrinking demand for consumer goods.

The industrial vacancy rate reached 10.2% in the third quarter, up sharply from 9.4% in the second quarter, and the 2010 forecast calls for depressed rents and more belt-tightening. As for new development in coming months, forget about it.

“Industrial real estate development is at a virtual standstill. It's at its lowest levels in 50 years,” says Craig Meyer, managing director of industrial services at brokerage Jones Lang LaSalle. “There's little or no construction that's going to be adding inventory into the pipeline.”

In October, the nation's unemployment rate reached the same ominous figure as the industrial sector's vacancy rate, 10.2%, the highest level in more than a quarter-century. As jobs vanished, consumer spending eroded, reducing demand for warehouse space.

“Consumer spending is way down and we don't expect it to rebound significantly for three or four more quarters. So it will be difficult for the industrial market to make a positive advance in terms of vacancy and rent levels,” says Al Pontius, managing director of office and industrial properties for Encino, Calif.-based brokerage Marcus & Millichap.

The volume of goods arriving from Asia at California ports dropped 30% year-over-year, affecting the U.S. supply chain, reports Jones Lang LaSalle. Year-to-date net absorption dropped to negative 113 million sq. ft. in the third quarter as occupancy levels fell for the fourth consecutive quarter.

REITs swing into action

ProLogis and AMB Property Corp., two giant real estate investment trusts (REITs), took steps to improve their balance sheets. “ProLogis was highly levered as a REIT. It compelled them to sell their Chinese portfolio, their Chinese development projects,” says Meyer.

Denver-based ProLogis recapitalized, raised equity and retired some debt, while AMB, based in San Francisco, shed assets to strengthen its financial position. ProLogis stock closed at $12.95 on Nov. 12, up from a 52-week low of $2.20. AMB closed at $24.06, up from its 52-week low of $8.73.

Economist Leonard Sahling of ProLogis Research Group said in October that he believed the worst was over for the bulk distribution market. However, he was concerned about rising sublease space. In central Los Angeles, available warehouse space rose to 3.6 million sq. ft. in the second quarter, an increase of 35.2% from the first quarter. In Chicago, sublease space increased by 38.5% over the same period, to 6.9 million sq. ft. The pattern continued in the third quarter.

One ray of light is that the falling U.S. dollar has made U.S. goods a relative bargain and spurred manufacturing. But that alone does not drive warehouse occupancy, and has little effect on the negative absorption plaguing major markets.

Retailers fine-tune shipments

Industrial companies and the retail tenants who patronize them are not standing still while their fundamentals wobble in the economic winds, however. Retail distributors are driving down costs by precisely calculating optimal transport and shelf time — the time it takes, for instance, to ship a DVD player from the manufacturer to the teenager who stands riveted by the latest Transformers disc.

Special visibility software helps to fine-tune logistics and track products, measuring time on the truck or warehouse shelf before reaching the consumer.

The nation's internal ports play a big role in maximizing efficiency and trimming costs. Companies use port diversion strategies to rely less on huge ports such as Los Angeles-Long Beach and make better use of ports such as Houston, says Pontius of Marcus & Millichap.

Entering 2010, there likely will be less reliance on giant storage centers of 1 million or 1.5 million sq. ft., and more storage activity involving spaces of 300,000 sq. ft. to 600,000 sq. ft., observes Meyer of Jones Lang LaSalle.

The shift in strategy reflects retailers' desire to store goods closer to the end user in regional facilities, rather than in behemoth centers far from the retailer and consumer. “It's all about efficiency in an incremental unit cost for that item that's on the shelf — the lowest possible price,” says Meyer.

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