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U.S. Industrial Sector Improving, but Recovery Remains Bumpy
added: 2010-07-30

The U.S. economy absorbed industrial space for the first time in 18 months, according to a new report released by Cassidy Turley.

In all, net demand for warehouse and flex space registered positive 6 million square feet – the biggest gain since the first quarter of 2008. The market leaders in the second quarter include Phoenix, Memphis, Louisville, Cincinnati, and Northern New Jersey – all of which recorded over 1 million square feet of positive demand. However, the report emphasizes that the industrial market will remain lackluster for several quarters to come.

"This report signals that businesses are gearing up for a year of better demand," said Kevin Thorpe, Chief Economist for Cassidy Turley. "They are preparing for better demand related to consumer products, better demand for motor vehicles and parts, better demand for construction materials, but better demand should not to be confused with robust demand or even consistent demand. For perspective, following the 2001 recession, there were seven quarters of negative absorption before the market truly turned the corner."

According to the report, mid-way through 2010, the U.S. industrial market inventory has grown by just 8.7 million square feet – a pace that is 80% below the historical annual average.

There is currently 1.1 billion square feet of empty industrial space on the market and another 14.0 million square feet under construction.

The report also points out that recent setbacks in the U.S. economy have created increased risks to the recovery in the industrial sector, but the general trend remains upwards.

"Since closing the chapter on the second quarter, consumer confidence has fallen back, retail sales have slipped, and employment indicators that correlate with demand for industrial space have weakened," added Mr. Thorpe. "None of this is surprising. Recovery periods are always bumpy and fraught with setbacks, but rarely do these setbacks result in a double-dip. Thus, our forecast for the economic recovery and the industrial recovery remain largely intact."

In the second quarter of 2010, U.S. industrial vacancy registered 9.9%, up 10 bps from the previous quarter. Although the trend has remained essentially flat since September of 2009, vacancy was still 180 bps above its historical 10-year average of 8.0%. Average asking rents for warehouse space were $5.10 NNN, a 1.1% decrease from that registered in the previous quarter. This marks the seventh straight quarter of rent declines.

As the demand for industrial space slowly comes back to life, Cassidy Turley reports that sale volume rose to $3.1 billion in the second quarter, the strongest quarterly level of activity since the fourth quarter of 2009. Year to date, industrial sales volume is $5 billion, up 28% compared to this same period one year ago.

Cassidy Turley also reports that sales of industrial properties are picking up, with the greatest increase in activity observed in port cities as well as certain pockets in the Midwest. Los Angeles and Orange County alone accounted for over 21% of total warehouse sales thus far in 2010. Chicago saw 14 deals trade for $166 million and Indianapolis saw 7 properties trade for $70 million.

Regional Summary:

The South led all regions as net demand registered at 5.3 million square feet of industrial space in the second quarter of 2010. Louisville & Memphis led the way, both recording over 1 million square feet in positive absorption. Both markets have benefited from growing storage needs related to healthcare, motor vehicles, and an improvement in construction and infrastructure projects driven in part by stimulus funding.

The West region also experienced a solid rebound in demand. Phoenix posted the highest regional gain of the quarter, recording +1.4 million square feet of absorption. The Phoenix metro area's economy is showing strong signs of recovery, as the manufacturing sector, retail trade, and corporate profits from area employers posted strong gains.

The performance in the Midwest was very uneven throughout the region, as some markets including Cincinnati, Detroit, and St. Louis recorded very strong gains in absorption, where other markets, such as Chicago and Cleveland posted losses that exceeded 1 million square feet. The uptick in demand in the region was driven largely by expansion in consumer-related products and from logistics and transportation companies – an early indication that businesses are gearing up for more growth.

In the Northeast, net demand registered negative 1.1 million square feet. Despite being the only region to experience a drop in demand in the second quarter, conditions have improved as employment gains occurred in almost every sector over the quarter. Northern New Jersey posted the most significant gain in the quarter with positive 1 million square feet of absorption.

Source: PR Newswire

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