Logistics space vacancy rates on the decline
Real estate giant Grubb & Ellis is forecasting the U.S. logistics space vacancy rate to drop to 11.5 percent in 2011 from the 12.8 percent seen in the fourth quarter of 2010.
'All the major components are present to justify expectations of demand outpacing the relatively strong performance recorded in 2010,' the company said in its semi-annual Logistics Trends report. 'The overall economy is expected to finally grow at above its potential, job growth is expected to accelerate and corporations have the cash (about $2 trillion at the end of 2010) and profits (corporate profits have returned to the all-time high previously recorded in the third quarter of 2006) to accelerate business investment.
'Supply will remain constrained. Currently, less than 7 million square feet of new logistics buildings is under construction across the nation, of which only 270,000 square feet is vacant. Additional projects will be announced during the year, but 2011 will be the year with the least amount of new deliveries on record. High demand and no new supply is a great combination for vacancies. By the end of 2011, Grubb & Ellis expects the overall logistics vacancy rate to fall to about 11.5 percent.'
Demand surged in the second half of 2010, the company said.
'Demand for logistics space did respond positively and following a strong first half, almost 20 million square feet was absorbed between July and December of 2010,' the report said. 'Demand was more heavily weighted to the fourth quarter, when 15.9 million square feet was absorbed, a quarterly performance that would not have been discouraging even during the market's peak activity between 2005 and 2007.'
Grubb & Ellis said national warehouse space 'was not hit as hard by the downturn of demand as the overall industrial sector.
'The cumulative net absorption dating to the first quarter of 2009, the first quarter with negative demand, turned positive in the fourth quarter of 2010, signifying that total occupied space has returned to pre-recession levels,' the report said. 'The current elevated vacancy levels are therefore a result of new supply delivered prior to the recession rather than negative demand.
'The severity of the recession did halt new deliveries to levels not seen in Grubb & Ellis's statistics previously. Cash developers, pension funds and other institutional investors struggled with write-downs of investments already on their books, while REITs changed their focus to deleveraging their balance sheets. Leveraged buyers, such as private local and national developers, were sidelined by the unavailability of financing. The result was an uncharacteristically fast response on the supply side, which added only 18.5 million square feet over the past six quarters. This aggregate is less than the quarterly average for the prior three years.'
Vacancy rates varied widely depending on the region.
'The national vacancy rate, the best measure of the overall market state, continued its downward trend during the second half of 2010, ending the year at 12.8 percent,' the report said. 'This decline represented a 50-basis-point improvement over the mid-year figure and a full point improvement over the vacancy recorded at the end of 2009.'
Coastal Southern California had the lowest vacancy rates nationwide — with Los Angeles at 4.2 percent and Orange County at 5.5 percent. Only Minneapolis-St. Paul, at 4.5 percent, had comparable vacancy rates. The vacancy rate in Southern California's Inland Empire was 11.4 percent. Among other logistics hubs, Indianapolis was 13.2 percent, Memphis 15.1 percent, and Atlanta 16.2 percent.
The highest rents were in San Jose-Silicon Valley; Broward County, Fla.; and Los Angeles.