COVER STORY, JANUARY 2009

INDUSTRIAL OUTLOOK
Is your plan aligned with your market's momentum?
compiled by Brian A. Lee

The current economic storm is causing concern for some industrial players; others are using the resulting winds to fill their sails. Western Real Estate Business contacted one of the foremost brokerage companies in the nation to get the lay of the industrial land in the West and how to navigate 2009.

Denver

2008 demonstrated the speed with which information can change the world. At lightning speed, the Denver industrial market was dramatically impacted by the financial meltdown. Seemingly overnight, low cap rates of 6 to 7.5 percent evaporated, strong tenant demand softened, new construction halted, financing moved away and the market overall underwent a major paradigm shift. The question as we enter 2009 is what remains and how will business be conducted going forward?

Everyone wants to time the bottom just right. The view here is that we are there. Appropriate cap rates in the 8 to 11 percent range are now available, companies that have repositioned themselves are now pursuing attractive, inexpensive space for lease, and lenders are loosening the purse strings for loans that fundamentally make sense. Fourth quarter 2008 and the beginning of 2009 will be remembered during the next decade as an ideal time to have bought industrial real estate or entered into a long-term lease.

Anticipate that vacancy rates in Denver will continue to rise modestly in 2009 from their current level of 8.1 percent to as much as 8.75 percent. As a result, market rents will continue to decline, and there will be very few, if any, new construction starts. Fortunately, the Denver marketplace was not overbuilt during the last cycle. That fact coupled with a diverse industry base including alternative energy, aerospace, defense, oil and natural gas will help the Denver marketplace recover quicker than most parts of the country. The market has definitely shifted and a new, healthier market is in place as 2009 begins.

— R.C. Myles is a senior vice president and Tyler Smith is a broker associate at Fuller Real Estate in Denver.

Albuquerque

The most noticeable changes in the Albuquerque industrial market in 2009 will be the diminished sale and lease activity due to the national recession and financing challenges. Lease rates and vacancies throughout the market will remain flat. New construction will consist of build-to-suit options, while speculative projects cease.

The median lease rate for warehouse/distribution space will be $6.50 to $6.75 per square foot, while the vacancy rate is expected to hold at 6 to 7 percent based on a market size of approximately 38 million square feet.

Lack of available land for industrial development along the north Interstate 25 corridor will continue to push industrial growth to the west side of the city along Interstate 40 and on the south side along I-25, near the Albuquerque International Airport. Adjacent to the airport is the most active submarket, the master-planned Mesa del Sol community. Schott Solar, Fidelity Investments and Albuquerque Studios will occupy a cumulative 810,000 square feet of industrial office and warehouse space when completed in 2009.

— Rich Diller is president of NAI The Vaughn Company in Albuquerque and Rose Cabezut is an associate broker.

Seattle

The Seattle/Puget Sound industrial market is performing remarkably well considering the national economic downturn. Due to geographic and land-use constraints, there has not been excessive speculative building in the last year. The regional market totals more than 307 million square feet. As expected, new construction has stopped and rental growth is down, but overall vacancy is currently 6.2 percent. This compares to a vacancy number of 4.8 percent at the same time last year. Rental rates vary by submarket, but generally speaking they average $4.08 to $4.80 per square foot annually for bulk distribution space. With the lowest vacancy rate and most square feet, the strong Kent Valley submarket continues to be the leader and the first choice of submarkets for institutional investors. Expect the Seattle area industrial market to continue to soften for at least the next 12 months, but with Boeing and Microsoft still thriving, it should weather the storm better than most markets.

— Jeff Forsberg is principal at NAI Puget Sound Properties in Bellevue, Washington.

Portland

Industrial activity in the Portland-Vancouver metropolitan area slowed considerably in 2008, reflecting national economic conditions. Third quarter vacancy stood at 10.75 percent overall, not much of a change from the past several quarters. Little new construction is underway as the market tries to absorb the surplus. Industry watchers take some cheer, though, in the fact that most of the vacancy is located in the North-Northeast Corridor, near the Port of Portland and Portland International Airport. This concentration is a direct result of a construction binge that started in 2006-2007 with product deliveries occurring around the first of 2008. Today 3.7 million feet is available in this area, and most of that is in a few larger projects built to accommodate the growing distribution needs of the region. RREEF, ProLogis, DP Partners, Opus Northwest and Birtcher all have work to do to get their buildings filled. Generous tenant-improvement packages and free rent are the main concessions given to encourage tenants.

— H. Roger Qualman is executive vice president and Ken Boyko is vice president of NAI Norris, Beggs & Simpson in Portland.

San Francisco Bay Area

The San Francisco Bay Area houses more than 350 million square feet of industrial product (warehouse and manufacturing) with the highest concentration located in the East Bay’s Interstate 80/880 corridor. The East Bay market contains roughly 162 million square feet for combined manufacturing (86.8 million) and warehouse (75.2 million) facilities. This market has a diverse industry base due to its gateway to the rest of the world via the Port of Oakland (4th busiest container port in the country) and Oakland International Airport.

The East Bay market ended third quarter 2008 with a combined vacancy rate of 6.4 percent compared to 5.4 percent at the end of 2007. Vacancy is expected to continue to rise with rental rates steadily declining during the next few quarters. However, the East Bay’s diverse industries, coupled with its institutional-grade facilities at affordable rates, will slow the pace of new vacancies to the market. Demand for industrial space remains active, with a better-than-expected amount of current tours in the market. 

— Jeff Starkovich is managing partner at NAI BT Commercial in Oakland, California.

Phoenix

Phoenix never lacks for optimism when it comes to (over) building. The Phoenix industrial market comprises approximately 243 million square feet of warehouse space, but as of 1999 there were only about 55 buildings that exceeded 250,000 square feet of rentable building area. Eliminating the specialty properties occupied by Honeywell, Intel, Motorola, Avnet, Pepsi etc., the remaining 35 structures represented the big box distribution warehousing available in Phoenix in 1999.

After 2000, Phoenix entered the “Field of Dreams” era — “If you build it, they will come.” With larger distribution center requirements of 300,000 to 600,000 square feet circling the marketplace, more nationally renowned developers focused on land acquisitions, and the speculative construction boom throttled up in the early 2000s. Since 2000, 33 big boxes have been constructed, adding approximately 15.23 million square feet to the market’s inventory. This enabled Phoenix to land distribution and fulfillment centers for Amazon (2), Ulta Cosmetics, USPS, Macy’s, Price/Costco, Wal-Mart, The Home Depot, Target and Coca-Cola, among others. There are currently 3.5 million square feet of spec big box projects under construction for 2009 delivery, with about 20 proposed projects that would have added another 11 million square feet (currently dormant).

Under current market conditions, with a multitude of vacant, first-generation, state-of-the-art space available combined with downward pressure on rental rates, Phoenix represents a huge attraction to big box/distribution center users.

— Isy Sonabend is a senior vice president for NAI Horizon in Phoenix.

San Diego

While economic fundamentals continue to be solid in San Diego, the slumping housing market and declining economic indicators have pushed it into a recession and eroded consumer confidence. Businesses, especially in the construction, mortgage, real estate and title insurance industries, have suffered high employment losses resulting in the first negative job growth rate since the 1990s; do not expect recovery before 2010.

The industrial market continues to perform well throughout the county with stable but rising vacancy rates. While some industrial development has occurred at the extreme northern and southern boundaries of the county, a shortage of industrial land, decreasing tenant demand and tight credit has curtailed such development in most of San Diego.

Although prices for closed commercial transactions have declined only slightly, there is clearly market uncertainty with both buyers and sellers acting skittishly, unsure of pricing. Lenders’ underwriting standards have certainly tightened, making financing more expensive and lowering leverage. Combined with job losses and loss of home equity leading to reduced consumer spending, many players are waiting on the sidelines to buy or sell, preferring to let the turmoil settle and avoid making a bad deal. Increasing rent concessions and vacancies will force cap rates higher. The prediction here is that price declines will occur throughout 2009 and possibly into 2010 before stabilizing.

— Marten Barry Jr. is president of NAI San Diego.

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