U.S. INDUSTRIAL LEASING RETURNS TO PRE-RECESSION LEVELS

U.S. INDUSTRIAL LEASING RETURNS TO PRE-RECESSION LEVELS

C&W Reports More Demand, Less Supply Among Signs of Market Progress

CHICAGO, IL – May 26, 2011 – (RealEstateRama) — The return of leasing activity to pre-recession levels and tangibly declining supply in the U.S. industrial market signify continued momentum toward recovery, according to Jim Dieter, SIOR, who heads the national industrial brokerage platform for commercial real estate services firm Cushman & Wakefield, Inc.

Dieter’s group provides global resources for tenant and landlord representation, disposition and acquisition services, transaction management, and industrial consulting including labor and demographic analysis. In the following interview, he comments on the company’s first quarter market data, the state of industrial real estate heading into mid-year 2011 and what he expects to see moving forward.

Cushman & Wakefield has reported on an improving industrial landscape. What signs are most compelling?

First and foremost, the industrial sector saw its highest first quarter leasing totals since 2007. That is a hugely positive sign. 68.0 million square feet of deals were done during January, February and March. This represents a 12.5 percent increase, up from 60.4 million square feet leased during the first quarter of 2010. Some pockets have jumped significantly – industrial leasing in New York’s Long Island market jumped 172 percent year over year; Suburban Maryland saw a 118.8 percent increase.

Additionally, overall space absorption was positive 7.7 million square feet at the end of the first quarter, up from negative 15.8 million square feet at this time last year. The overall vacancy rate, which we have addressed as “stabilizing” over the past year, is beginning to move down. At the end of the first quarter, it registered as 10.2 percent, a 0.1 percentage point drop from year-end 2010 and a 0.6 percentage point drop from one year ago. In fact, vacancy rates declined, quarter-over-quarter, in 22 of the 34 U.S. industrial markets tracked by Cushman & Wakefield. The movement is small, but there is no doubt that we are seeing things begin to tighten.

What are the market’s primary positive drivers?

The economy in general continues to be the catalyst for activity across real estate in general. However, within the industrial sector manufacturing is a major driver right now. The U.S. Bureau of Labor Statistics reported in May that manufacturing productivity grew 6.3 percent in the first quarter of 2011, with output and hours worked increasing 9.7 percent and 3.3 percent, respectively. Over the past four quarters, manufacturing productivity increased 4.7 percent, according to the same report.

In short, manufacturing continues to grow in the United States, in terms of output and jobs. This translates to absorption of industrial space. And manufacturing goes hand-in-hand with exports. Cushman & Wakefield’s research shows that almost all of our seaports have shown growth year over year for the past two years. This is no coincidence.

We expect that the southeast part of the United States – which has abundant pro-growth regions – will experience the most manufacturing growth in the coming years. This activity will stem from both within our borders and as an alternative to Mexico.

What, if any, negative factors are influencing activity?

Rising energy costs continue to plague companies that rely on moving goods from factory to consumer. That’s the bad news. At the same time, these challenges invariably impact real estate decisions, which many times are made around shifts in logistics and supply chain platforms. As organizations work to reduce energy consumption, they may lease smaller buildings and/or build closer to their customers or retail bases. This creates real estate activity.

New construction has remained limited. Will this change in the near term?

Minimal construction in the market has been – and continues to be – an important factor in its ability to catch up with itself and achieve a balanced supply-and-demand equation. Just 3.2 million square feet of new product has been added to the market so far this year. This is on par with what was delivered in the first quarter of 2010, and represents the lowest amount of construction completions since Cushman & Wakefield started tracking the U.S. industrial market.

However, with that said, southern California will be the market to watch. The Inland Empire region historically has been the first market to feel a recession and, subsequently, come out of one. The tradition is holding true this time around. That market leads the country in industrial market activity, and is beginning to see absolute rent increases and positive absorption. Now, developers are talking about plans for speculative construction projects there. That type of discussion simply has not existed since the crash.

What is the industrial outlook for the remainder of the year?

As a disclaimer, lack of job growth in the United States and unpredictable geopolitical activities around the world could trump the progress we have seen. Yet beneath this shadow, there is plenty of light and optimism. By all indications, market fundamentals are showing slow but steady improvement. We expect the positive trends – in leasing, absorption and growth in key industries like manufacturing – to strengthen even further as we head into the heart of 2011.

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