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Home » U.S. Industrial Markets Reflect Much-Anticipated Recovery

U.S. Industrial Markets Reflect Much-Anticipated Recovery

March 14, 2011
Jim Dieter, Executive VP, Industrial Brokerage, U.S., Cushman & Wakefield

The global economy is now 19 months removed from the official end of the recession, and industrial real estate markets across the nation are beginning to reflect a much-anticipated recovery. While relatively slow during the first quarter of 2011, progress remains steady, and market indicators continue to track upward.

Companies leased 268.8 million square feet of United States industrial space in 2010, up 16.5 percent from 2009. Twenty-three of the 34 domestic markets tracked by Cushman & Wakefield recorded increases in leasing activity year-over-year. As a result, the overall vacancy rate for the industrial market dropped to 10.3 percent at year-end 2010, down from 10.6 at the end of the third quarter (after reaching a high of 10.8 percent in the first quarter of 2010).

Rents absolutely are stabilizing. Following 10 consecutive quarters of decline, direct net asking rents for United States industrial space rose slightly during the fourth quarter of 2010, ending the year at $5.51 per square foot. Investor appetite for industrial real estate also rebounded last year; 99.9 million square feet of property traded hands, up 64.4 percent from 2009.

These types of increases make it apparent that confidence is building on behalf of both users and investors. All of our offices across the county are reporting increase in activity from a ground-level view. Historically, leading markets are among the first to enter - and subsequently emerge - from a down cycle. Key industrial hubs appear to be following tradition this time around as well.

Southern California's Inland Empire, which houses more than 1 billion square feet of industrial space (the largest concentration of industrial product in North America) provides an excellent illustration. It was among the markets that recorded the largest decreases in vacancy during the fourth quarter of 2010 -  declining 0.7 percentage points to 11.0 percent. Today, activity in the Southern California marketplace is leading the nation in industrial absorption. This is a good barometer of what we will see ahead.

Regardless of what market activity and data tell us, two major factors have game-changing potential. The first is jobs. Employment trumps everything - unless job creation picks up, the recovery will stagnate. The second is our geopolitical environment. Unrest abroad over the past few months - its duration and its outcome - will be a huge stakeholder in the way some of these fundamentals play out.

Within this context, manufacturing will be an interested sector to watch during 2011. Over the past few years, we have seen reports that some manufacturing is leaving Southeast Asian markets to come back to the United States, citing quality control, speed to market and energy efficiencies as significant motivators. That trend appears to have slowed;  however, here in North America, issues in Mexico - particularly upheaval along the border - now appear to again be sending manufacturing our way.

In recent months, several significant manufacturing requirements that originally had been looking at the border zone of Mexico have made the decision to target the southern United States. For example, in late 2010 Electrolux selected Memphis, Tenn., as the location for its North American Cooking Products manufacturing center - after seriously considering sites in Mexico. Construction for the $190m, 700,000-square-foot facility is scheduled to begin shortly. The operation will employ more than 1,200 people.

Another, even more recent Memphis transaction illustrates stepped-up activity among manufacturing companies across the board. In February, Mitsubishi Electric Corporation announced its plan to locate the headquarters of its North American heavy electrical equipment production there. The firm will build a new, $200m, 350,000-square-foot factory that will employ 275 workers at full production.

As always, supply chain efficiencies remain a top priority for companies. How many buildings should they have? How close are they to consumer centers? What is the time to market? And, among many driving factors, the cost of energy - and therefore cost of transportation - will play a major role in where companies choose to locate this year. We expect that rail hubs, particularly intermodal markets, will experience the most notable near-term growth.

We are very cautiously optimistic looking ahead for a number of reasons. Global trade, a key benchmark for the health of our industry, is helping to drive the recovery, with several key metrics returning to pre-recession levels. It appears that a large percentage of companies have healthy balance sheets and a good amount of cash capital to invest in new products, technologies and markets. Add to that the good news that construction remains at a virtual standstill, and we can expect to see significant absorption in the near future.

In short, we are poised for a very nice growth pattern. Provided that global conditions do not "spook" our large companies into keeping their capital on the sidelines, Cushman & Wakefield remains confident that this momentum will build and the industrial landscape will remain strong in 2011 and beyond.

Source: Cushman & Wakefield

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Jim Dieter, Executive VP, Industrial Brokerage, U.S., Cushman & Wakefield

U.S. Industrial Markets Reflect Much-Anticipated Recovery

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