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Industrial Loses Its Luster as Consumer Demand Wanes

Not so many months ago, the nation’s industrial markets appeared to be in fine health. Several recent reports, however, rightly note that industrial has quickly fallen into the same abyss that has captured every other property sector.

United States industrial properties recorded their weakest performance in the fourth quarter of 2008 since early 2002, according to summary statistics compiled by Colliers International. Absorption for the quarter turned to a negative 18.1 million sq. ft. after posting a gain of 6 million sq. ft. in the third quarter. For all of 2008, occupied space declined by 9.9 million sq. ft. compared with a gain of 142.6 million sq. ft. in 2007.

At the heart of industrial’s decline is a broad drop in demand for consumer goods on a worldwide basis. The closely watched JPMorgan Global Manufacturing Purchasing Managers’ Index rose only slightly in January to 34.9 from a record low of 33.7 in December. The index has scored below 50, or no change, for the past eight months.

Construction of warehouses and flex space is still booming, though slowing. Nationwide, 66.8 million sq. ft. of new industrial space was under construction at year-end 2008, down from 107 million sq. ft. in the third quarter. However, the three largest markets in the U.S. all have substantial pipelines of new buildings set to come on line in 2009.

Chicago, America’s leading industrial market with 1.7 billion sq. ft. of warehouse space, has 7.5 million sq. ft. under construction. That comes in addition to the nearly 17 million sq. ft. of space completed in 2008. In Los Angeles, more than 6 million sq. ft. of new space is underway, while a healthy 8.4 million sq. ft. will be added to the Dallas-Fort Worth industrial market this year, down from the 20.2 million sq. ft. delivered last year.

Industrial vacancies nationwide will soon hit their previous peak of 11.8% recorded in 2004, as the recession shows no signs of easing, according to CB Richard Ellis Torto Wheaton Research. The vacancy rate rose 60 basis points to 11.3% in the fourth quarter of 2008, marking the fifth consecutive quarterly increase and the largest quarterly jump in industrial availability since the first quarter of 2002.

Further complicating matters, the nation’s largest industrial developer and owner, Denver-based ProLogis, plans to sell off billions of dollars worth of assets to help reduce debt and right its financial ship. Recently the company has been marketing a 33 million sq. ft. portfolio of buildings in 14 states and the District of Columbia.

Many observers believe the sale, initially valued at more than $1.4 billion, will set a new benchmark for industrial property pricing as it comes amid the deepening credit crunch at the beginning of 2009. ProLogis is expected to announce a winning bidder by the end of February.

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