Skip navigation

Spec Building Wave Hits Industrial Sector

A long-running recovery in industrial property fundamentals appears to be winding down as an abundance of speculative warehouse and distribution space enters the market. Now analysts fear that some markets will be awash in excess space over the next 12 to 18 months.

Some key markets like California's booming Inland Empire are better equipped to absorb this space, say analysts. But other industrial hubs like Chicago — where year-end industrial vacancy hit 8.2%, or 50 basis points higher than the national average — may have trouble absorbing this heavy load of space.

Excess space could make it tougher for industrial landlords to boost rents. The fear is real, particularly in a market segment where developers can introduce new supply at a speedy clip.

“Of all property classes, the industrial market is the most sensitive to new supply right now,” says Bob Bach, director of market research at Oak Brook, Ill.-based Grubb & Ellis. “These facilities go up fast, and in places like Chicago the market just keeps expanding out, which opens up more viable sites.”

National industrial vacancy flattened at 7.7% between the end of September and December 2006 after posting declines for 10 consecutive quarters. Grubb & Ellis reports that rental rates in most markets followed a similar trajectory.

Grubb & Ellis as well as Boston-based Property & Portfolio Research (PPR) conclude that the national industrial market will end this year with higher vacancy. PPR projected that 38.5 million sq. ft. of new industrial space would hit the market during the first quarter of 2007, just below the previous quarterly peak of 42.5 million sq. ft. recorded in the third quarter of 2006.

Since every U.S. industrial market answers to a different set of economic factors, general forecasts are tough to defend. Yet a staggering amount of new industrial supply is entering the market at a time when the global economy is acting particularly volatile. The Shanghai Composite Index posted a 9% decline in late February, and that drop sent shockwaves through the U.S. markets.

A global economy creates both opportunity and risk. If global trade volume begins to narrow the flow of shipping containers into U.S. ports, plenty of speculative warehouses could remain vacant.

“We're particularly bearish on the Chicago market,” states Laura Stone, a senior economist at Boston-based Torto-Wheaton Research. “Net absorption in Chicago will continue to slow through 2008,” adds Stone, who has fewer concerns about the Inland Empire's booming industrial market.

At the end of last year, the Inland Empire was just 1.5% vacant. What makes that tight vacancy rate all the more impressive is the heavy volume of new supply that's been introduced to this market in recent years.

“This supply would really be a problem in most markets,” says developer Kipp Dubbs, president and CEO of Laguna Hills-based Omni West Group. Omni West specializes in small-box industrial facilities no larger than 20,000 sq. ft. in the Inland Empire. “But we're seeing huge volumes of container traffic move into our ports, and the economic growth is expected to last.”

PPR expects slower global economic growth, particularly in the U.S., to have a drag on import and export volumes in 2007. This would cut into industrial leasing absorption as new supply continues to hit the market over the next two years.

Industrial completions should hit 144 million sq. ft. this year, down from 153 million sq. ft. in 2006. The slight decline won't mute the effect that new supply will have on the industrial market.

“I'll reserve judgment on the extent of this new [industrial] supply,” says Bach of Grubb & Ellis. “It still seems too early to call it chronic overbuilding.”

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.