The North American industrial real estate sector has delivered positive news for the second quarter 2010, according to a new report by Jones Lang LaSalle. National average vacancy rates have tumbled 20 basis points for the first time in almost two years from 10.6 percent in the first quarter to 10.4 percent in the second quarter. Leasing activity across many markets is up, but the sector is still vulnerable to mixed economic indicators which could make sustained recovery slow or sporadic at best.

"While we can report some overall positive news for the sector, we are still very much at the mercy of this precarious economy," explained Craig Meyer, SIOR, managing director and leader of Jones Lang LaSalle's Logistics and Industrial Services group. "Declining consumer confidence, the fading impact of the federal stimulus support and worldwide economic volatility are forcing many industrial landlords, tenants and investors to look back over their shoulders in fear of a double dip recession."

While labor market pressures and slow job growth are dragging on the economy and keeping pressure on consumer spending, there have been positive indicators to offset some of the down side.  Increasing corporate profits have renewed long-term optimism which has in turn spurred a significant amount of second quarter industrial leasing activity. This was fueled by large occupiers executing significant renewal, consolidation or relocation transactions helping to temper overall vacancy figures.  However sustained deal volumes will be essential for a stronger turnaround in current trends.

"With the rise in corporate America's second quarter profits and a need to restock inventories that were running at 50-year lows, a number of large occupiers have strategically captured high quality logistics space at cyclically low rates," said Meyer.  "Opportunities remain in virtually every market at aggressive terms and even with the very modest levels of leasing and little or no speculative construction, choices are quickly becoming limited in some markets especially in the Class A large block sector."

"In fact there is only 11.3 million square feet of new construction in the pipeline and 83 percent of that is pre-leased. With such low levels of new construction planned in the foreseeable future, we expect to see an increase in build-to-suit activity," he concluded.

The report, which tracks 38 key industrial markets in the U.S., found that average net absorption is at 11.1 million square feet for the quarter, but remains negative at 7.4 million square feet so far this year, compared to last year's total of 126.6 million square feet percent.  Markets that also act as supply chains are performing well such as New Jersey where vacancy declined 60 basis points joining the Inland Empire with 4 million square feet of positive net absorption year to date, along with Dallas posting 2.4 million square feet of positive gains; both markets are trending toward organic growth.

"While pent up demand was responsible for some of the leasing activity, renewals still comprise a healthy share of market demand across the country," said Meyer.  "Many businesses are still sensitive to cost control and possible economic volatility so we are still seeing the 'blend and extend' market continue."

The overall availability of sublease space has decreased across the country, a positive sign that demand is on the rise again.  The highest volumes of marketed sublease space reside in Northern and Southern California, especially in Sacramento and the Inland Empire as well as mid-tier markets in the Southeast such as Memphis and Nashville.

The report also shows that nearly 66 percent of all the industrial markets tracked by Jones Lang LaSalle experienced positive net absorption with a further 20 percent showing declining absorption.  Major industrial markets such as Chicago and Los Angeles account for a combined 8.3 million square feet of negative net absorption so far this year.  However, both are showing recent signs of stabilizing, with submarkets around their ports and airports benefiting from recent growth in container traffic and cargo tonnage.

Demand for high-end, prime logistics space is topping the general market and has given a boost to Midwest markets like Memphis, Columbus, Dallas/Fort Worth in addition to the Inland Empire in Southern California, as well as key distributions markets in the Northeast such as Central New Jersey, Philadelphia and Harrisburg.

Overall average asking rents are still declining across the country, but the rate of decline is slowing and in second quarter fell by 1.1 percent.  The lowest industrial rents are in Columbus and Memphis and the highest in San Diego, San Francisco's Bay Area and South Florida.  Competition for tenants is fierce in almost every market and the growing level of concession packages, including periods of free rent and tenant improvement packages continue to be a critical component when completing deals.

While the economy is giving mixed messages and keeping real estate players cautious, demand for industrial real estate is slowly improving. Leasing in the form of expiration, early renewals and 'blend and extend' transactions has been providing the market with deal activity. If expansion requirements continue from large institutional users, the industrial market may keep its head above water and progress towards full recovery.

To access the report, click here: Q2 Industrial Report

Source: Jones Lang LaSalle