Industrial Real Estate Outlook

One reader asked us for an outlook on industrial development activity. We found a recent one that describes the real estate market, and here is what it has to say:

* Less is More. Completions will continue to fall in 2003, but a turnaround in the economy will begin to attract developers by 2004, leading to a modest rise. Total completions for 2003 and 2004, at 125 million square feet, will still be 20 percent below the amount of space completed in 2000.

* Vacancy Peaks. Strength in the manufacturing, distribution and trade sectors of the economy will revive demand, driving vacancy down from its peak of 10.5 percent in 2002 to 8.6 percent in 2004.

* Rents Rebound. After a flat year in 2003, rents will rise 4 percent in 2004. Concessions, which have been common in markets with vacancy rates above 12 percent, will begin to abate in the later half of 2003 and disappear entirely by late 2004.

* Fundamentals, Prices Diverge. Median sales prices for industrial properties continue to rise despite the recent deterioration in vacancies, rents and absorption. Low
interest rates and a lack of attractive alternative investments are keeping investor demand high.

* Sales Volume Down. The dollar volume of industrial sales in 2002 was down 25 percent from 2000’s peak. The number of transactions fell by 20 percent over the same period. Although weakening fundamentals played a role, the primary cause was lack of inventory.

* Cap Rates Fall. Buyers continued to put downward pressure on cap rates as low interest rates and 1031-exchange demand fueled higher prices.

* Positive Returns. While well below their peak levels of approximately 16 percent in 1997 and 1998, industrial investors managed to earn positive returns through the
recession and subsequent collapse in demand. Total return was 6.7 percent in 2002, down from 9.4 percent in 2001.

Source: Marcus and Millichap, Industrial Market Research 2003

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