Industrial-Strength Real Estate

By Bell, John | Mortgage Banking, July 2002 | Go to article overview

Industrial-Strength Real Estate

Bell, John, Mortgage Banking

Three markets examined up-close show that industrial real estate got modestly stung by the downturn, but is on its way back. Orange County, California, never missed much of a beat; Atlanta is still hurting with a 15.5 percent vacancy rate; and Chicago put the brakes on new construction and is poised for a rebound. This meat-and-potatoes asset class is still a favorite.

THE NATION'S INDUSTRIAL MARKET chugged through the recession suffering minimal setbacks compared with other property types-notably office, which clearly took some blows. And while industrial vacancies rose and absorption declined in 2001 as demand tailed off, industrial is well-positioned to lead other commercial real estate segments into recovery once the rebound gets in full gear, according to sources recently interviewed for this article.

One who shares this view is Thomas Bisacquino, president of Herndon, Virginia-based National Association of Industrial and Office Properties (NAIOP). "Industrial had the least increase in vacancy rate of any commercial property type during 2001, and is well-positioned to lead recovery," he says.

"Consumer spending is healthy and inventories are burned off now, so we'll see resupply that will increase production. Restocking will impact all industrial product," Bisacquino says. NAIOP represents more than 9,500 members in the United States and Canada.

David Houston Jr., vice president of the Society of Industrial and Office Realtors (SIOR), a Washington, D.C.-based international organization Of 2,700 commercial real estate professionals, says the comeback starts with increases in manufacturing and distribution, reflecting increases in consumer spending.

This time around, manufacturers weren't faced with huge inventories of consumer goods as in past downturns, because manufacturing slowed down as far back as the late 1990s into 2000 and the ratio of inventories to retail sales declined steadily through 2001 and early 2002, says Houston. "At the same time, new construction also declined-so we weren't throwing fuel on the fire like other downturns."

As a result of these factors, manufacturing is on the upswing. The U.S. Commerce Department reported on June 1, 2002, that orders for manufactured goods in April posted their biggest gain since October 2001, increasing by 1.2 percent to $323.87 billion, after a revised 1 percent advance in March. Analysts had expected an 0.8 percent increase in April.

Back in 2001, with fewer inventories of consumer goods sitting around, less space was required to house them. In its 2002 Comparative Statistics of Industrial and Office Real Estate Markets report, SIOR noted an industrial vacancy rate increase to 8.3 percent in 2001 compared with 6.6 percent in 2000. Most of the increase represents sublease space. Absorption dropped to 70.4 million square feet, compared with 133.3 million square feet in 2000.

Self-correcting market

On the positive side, industrial is regarded as a self-correcting market and is expected to lead recovery because of its short construction cycle, sources note. Industrial assets are less likely to undergo peaks and valleys caused by mismatches in supply and demand.

Michael Brennan, president and chief executive officer of Chicago-based First Industrial Realty Trust Inc., an industrial real estate investment trust (REIT), says, "The longer the construction cycle, the greater the volatility and deeper the cycle. A shorter cycle creates less volatility and quicker recovery, as less product will be dumped into the pipeline. It takes only six months to build an industrial building."

Moody's Investors Service

A major source of industrial market data is New York-based Moody's Investors Service. Moody's quarterly CMBS: Red-Yellow-- Green(TM) Update views the health of the underlying real estate supporting commercial mortgage-backed securities (CMBS). Moody's uses a traffic-light approach in ranking property types and markets in terms of green (not under stress), yellow (on the cusp of imbalance and therefore fragile) and red (already under imminent stress from supplydemand imbalances). …

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