The Purchasing Managers Index continues to show month-over-month improvement. Recent reports indicate that companies are beginning to restock their shelves and build their inventories. Imports and exports are picking up. Many companies reported stronger earnings at mid-year 2010.
This all reflects positive direction for key fundamentals impacting United States industrial real estate performance. Cushman & Wakefield, Inc.’s mid-year research findings show an increase in leasing and user sales, which indicates that industrial users are, once again, focusing on their real estate needs and reinforces the position that we have begun to climb out of the depths of this recession.
In fact, leasing transactions totaled 126.6 million square feet during the first six months of the year, 25.6 percent higher than at mid-year 2009. Perhaps more importantly, the overall vacancy rate for the United States industrial market declined for the first time in 11 quarters, to 10.6 percent. This marks what could be the start of a significant trend toward market equilibrium.
The sales market has improved considerably from last year as well, thanks to the return of financing that is enabling both users and investors to take advantage of lower pricing. User sales total 33.6 million square feet year-to-date – double the amount sold during the first six months of 2009. Investment sales, totaling 33.3 million square feet, reflect an increase of 32.3 percent from last year.
At the same time, we have seen such a buildup of vacant inventory that we likely are facing another 12 to 18 months of struggle on this upward trajectory before we see absorption reach a point that will drive rents higher.
The country’s largest industrial markets – Los Angeles, Atlanta, New Jersey, Chicago and Dallas – account for some 30 to 40 percent of our total industrial inventory. These five “mega markets” all need to show healthy increases before the upturn can be classified as in full swing. But only two of these regions are experiencing what can be considered strong activity: Los Angeles saw a 6.7 million-square-foot, year-over-year leasing increase, while Atlanta saw a 2.0 million-square-foot, year-over-year increase.
This volatile time has generated a catch-22 for some sectors, especially factories. This highly capital-intensive industry is seeing increased demand to fill orders. Yet after scaling back on labor and equipment investments, they face the hard decision of whether to rehire, reinvest and restructure in order to benefit from this shift. Doing so would be a leap of faith, albeit one that could have a huge payoff. The dynamics are interesting, to say the least.
Looking ahead, we are cautiously optimistic for the remainder of 2010. The fact remains that the industrial real estate market and all of the fundamentals that guide it are fragile. Everything gets trumped by jobs, and the latest reports continue to show weak employment data. Still, we are moving in the right direction, with increased demand, little new product coming online and the historical backing that all down cycles do come to an end.
