When Will Industrial Get Back on Its Feet? Has the Industrial Property Market Begun Its Recovery or Is It Still Looking for a Bottom? This Market Was Knocked for a Loop by the Deep Recession, but Some Now Believe the Worst May Be Over

Article excerpt

Industrial real estate, traditionally one of the most stable of asset classes, has been hard hit by the recession. Vacancies are up, demand is down and leasing has tailed off sharply. New construction has virtually dried up. Moreover, owners and operators are scrambling to maintain net operating income (NOI) in the face of declining rentals.

[ILLUSTRATION OMITTED]

The root cause of this bleak scenario is the sharp economic contraction that occurred during the recession. Sources we interviewed explained there's a high correlation between industrial market fundamentals and GDP (gross domestic product) growth--an 80 percent correlation, according to Hugh Kelly, principal of Brooklyn, New York--based Hugh Kelly Real Estate Economics, a national real estate consulting firm.

Bruce Duncan, chief executive officer of Chicago-based First Industrial Realty Trust Inc., adds, "Our business is a reflection of GDP."

Commenting on industrial, the 2010 Emerging Trends in Real Estate report co-produced by the Washington, D.C.--based Urban Land Institute (ULI) and New York--based PricewaterhouseCoopers (PwC), notes, "This highly economic-sensitive property type gets slammed by the worst recession since the Great Depression."

The ULI/PwC report sums up the impact of the recession on the industrial property market this way: "Availability levels rise to record highs because of lack of imports, the consumer deep freeze and dead housing markets. Rents suffer unprecedented declines as demand turns incredibly soft."

Severe impact

Robert Bach, senior vice president and chief economist of Santa Ana, California--based Grubb & Ellis Co., says, "The recession's impact on industrial was severe. The market is the bleakest I've seen since the early 1990s." He cites as evidence large amounts of negative absorption, lower rentals and declines in occupancies.

Luciana Suran, economist at Boston-based CBRE Econometric Advisors, agrees there's been a "huge" impact. "It's worse than the 2001 downturn," she observes. She says major reasons include the credit market freeze and a huge decline in international trade volume.

Kelly adds, "Manufacturers have been playing it close to the vest, with no credit available to refinance inventories."

Duncan confirms that rental rates were down 10 percent to 20 percent in 2009 versus 2008, while vacancies rose to 14 percent in 2009 from 12.4 percent in the previous year.

Alan Pontius is senior vice president and managing director, national office and industrial property group, for Encino, California--based Marcus & Millichap Real Estate Investment Services Inc. He notes the lack of new construction. "Spec development is incredibly low; 2009 deliveries were the lowest in 25 years, he says.

A. Dwight Hotchkiss is executive managing director for U.S. industrial at Los Angeles--based Cushman & Wakefield of California Inc. He says industrial leasing was down 15 percent to 25 percent in 2009 compared with 2008 because of business pulling back on decision-making and deals.

"Any deals completed were short-term in nature. Larger industrial REITs [real estate investment trusts] were left with broken pro formas, referring to the significant drop in rental rates versus what they had based their initial development on."

Warren Higgins, senior vice president, Berkadia Commercial Mortgage LLC, Horsham, Pennsylvania, says the recession had a nearly immediate negative effect on industrial property. "It hit faster than the previous recession. With more sophisticated distribution systems, companies cut back on inventories, resulting in an almost immediate impact on the industrial market and a lot of facilities [that] were tied in with retail," he explains.

Ross Moore, senior vice president of marketing and economic research at Boston-based Colliers International Property Consultants Inc. …