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Monday, July 27, 2009

Industrial-space vacancies defy national trends

By Copyright © 2009 Albuquerque Journal By Richard Metcalf
Journal Staff Writer
          Roadrunner Food Bank's recent relocation and expansion was one of the major deals that helped drive down vacancies in industrial space during the second quarter in the Albuquerque metro area, defying a national trend.
        The metro vacancy rate dropped from 9.5 percent in the first quarter to 8.9 percent in the second, according to Grubb & Ellis New Mexico's latest Industrial Trends Report. The national trend saw the average vacancy rate nationwide rise from 9.5 percent in the first quarter to 10.7 percent in the second.
        "This was by far the largest one-quarter gain in the 22-year history of Grubb & Ellis' survey," said the Santa Ana, Calif.-based company in its overview of the U.S. industrial market.
        In contrast, Albuquerque saw just over 400,000 square feet of industrial space filled during April-June, according to Grubb & Ellis' local office.
        Roadrunner moved from a 33,452-square-foot warehouse in the airport area to the 165,690-square-foot warehouse at 5840 Office NE. The warehouse on Office NE was formerly used by Southwest Distributing, which was absorbed through an acquisition into Shamrock Foods Co.
        Also in the second quarter, Schott Solar moved into its 200,000-square-foot manufacturing plant at Mesa del Sol, the 12,900-acre master-planned community south of the airport. The plant was a "build-to-suit" project, meaning it was designed and built specifically for Schott to use.
        Outside a handful of deals, the local Industrial Trends Report says, "Overall leasing velocity has slowed down considerably."
        Demand for industrial space, particularly in warehouses, is down because of the drop in consumer spending on the goods that normally get stored in them. The decline in construction activity has also had a major impact on warehousing.
        "Demand for space will likely remain weak until home construction ramps up," the report observes.
        Among the 58 metro areas tracked by Grubb & Ellis, Albuquerque was one of only 12 to stay in the black in terms of industrial space filling up.
        While the drop in vacancies from the first to second quarter is encouraging, the vacancy rate is up substantially from 6.3 percent in the second quarter of 2008. The rate had taken a jump of 2 percentage points, from 7.5 percent to 9.5 percent, between the end of 2008 and the first quarter of this year.
        The most recent high in the vacancy rate for industrial space was 11 percent in the second quarter of 2005, according to Grubb & Ellis. The high rate in 2005 was largely the result of overbuilding, not company closings and downsizings that we're seeing today.
        In fact, construction of industrial space is way down in the metro area, reflecting a trend across the country. There is only 43,200 square feet currently under construction on the West Side, which the Industrial Trends Report describes as a "historically low level."
        The scarcity of new construction "should help limit any future vacancy spikes," the report notes.
        Inevitably, the slowing demand for industrial space is driving down lease rates, which is good news for companies looking to rent. In Albuquerque, the average asking lease rate dropped 12.7 percent from $7.86 a square foot in the second quarter of 2008 to $6.86 in the same period this year. The trend of declining lease rates is expected to continue.
        For comparison, the average asking lease rate nationwide dropped 2.7 percent to $5.54 a square foot from earlier. Grubb & Ellis notes that, when all the concessions like free rent are factored in, the effective or real lease rate dropped 22 percent nationwide.
        The big jumps in vacancy rates –in the first quarter in Albuquerque, in the second quarter nationwide – raises the possibility that industrial real estate vacancies could be headed close to record highs. Nationally, the record high vacancy rate is 13.7 percent set in the first quarter of 1992, according to Grubb & Ellis. Albuquerque's record, set around the same time, is likely to be approached during the current downturn.