Industrial real estate still stuck in low gear

Demand for industrial real estate is stuck in the same low gear that it has been in since early 2009, reflecting caution among businesses as they face continued economic uncertainty.

The vacancy rate for industrial space was 9.7 percent in the Albuquerque metro area in the second quarter, down from 10 percent in the first quarter but up from 9.4 percent in the second quarter of 2011, according to Grubb & Ellis New Mexico’s latest Industrial Trends Report.

“Activity is definitely inconsistent,” said Rich Diller of NAI Maestas & Ward Commercial Real Estate Services.

“We are still in a situation where we get a space leased and then another one comes back on the market,” said Mike Leach of Sycamore Associates. “Space is coming back on the market for a number of reasons: bankruptcy, downsizing, closing the Albuquerque branch and serving Albuquerque out of another regional city.”

The upshot is the industrial vacancy rate has generally bounced between 9 percent and 10 percent for three-and-a-half years, depending on whether more space goes empty than fills up during a given three-month period.

“Overall, the average size of transactions is relatively small and getting smaller,” said Jim Smith of CBRE, noting that nine of the 32 lease transactions that his firm tracked in the second quarter involved space of less than 3,000 square feet. “It’s small companies moving around.”

CBRE, a commercial real estate services firm that also tracks the market in Albuquerque, observes in its latest report, “No prospective tenants are anticipated to enter the market within the next few quarters to positively impact the industrial real estate statistics.”

One positive sign in the industrial market is that the volume of lease renewals appears to be on the rise, said Erick Johnson of Johnson Commercial Real Estate. The increase in renewals could indicate a slackening in the pace at which vacated space comes back on the market.

“The trend seems to be the larger operators are a bit more comfortable with the status quo,” he said. “I think it’s a stabilizing factor.”

The industrial market faces the same headwinds as the local economy in general, including the absence of sustained job growth and the construction downturn. Homebuilding typically accounts for 20 percent of warehouse occupancy, according to Cassidy Turley Commercial Real Estate Services.

“Defense contractors, a longtime stalwart of the industrial market, appear to be in the process of re-evaluating their space needs, driven by rumblings of potential budget cuts in defense spending,” says Grubb & Ellis’ trends report.

An industrial vacancy rate of 9.7 percent doesn’t seem so bad, especially in light of the fact that the office real estate market had a vacancy rate of 18.8 percent in the second quarter.

Albuquerque’s industrial market has a track record of relative stability. Its vacancy rate has generally ranged from a low of 4 percent to a high of about 11 percent over the past 20 years, a 7 percentage point spread that’s almost half that of the office market.

The industrial market’s stability points to a more consistent balance in the supply-demand equation.

As often as not, overbuilding is the main reason behind high vacancy rates in commercial real estate of any type. The industrial market’s most recent vacancy rate high of 11.2 percent, set in the third quarter of 2005, was largely the result of new buildings opening with unleased space.

When the industrial vacancy rate drops to 4 percent — something that hasn’t happened in at least 14 years — lack of new construction is inevitably a factor. Demand has outstripped supply.

“A 4 percent vacancy rate, for practical purposes, is no vacancy,” said Tim MacEachen of Grubb & Ellis. “That space is vacant for a reason — underpowered, low ceilings, small lots with limited outdoor storage and poor truck circulation.”

The industrial real estate market is a diverse commercial property type that includes far more than manufacturing and assembly plants like Intel Corp., American Gypsum, General Mills and Eclipse Aviation.

The most active component of the industrial market is warehousing and distribution, which makes up about 30 percent of the total inventory.

The market also includes “flex” — short for flexible — buildings that typically look like offices from the street. Flex buildings, which make up about 11 percent of the industrial market’s total inventory, are typically used for tech and medical-related research and product development.

In the second quarter, the average asking lease rate for all the different kinds of industrial buildings was a blended $6.45 a square foot, according to Washington, D.C.-based Cassidy Turley. Grubb & Ellis and CBRE reported similar average asking lease rates.

Albuquerque’s average rate is one of the highest in the country. The $6.45 rate is 28 percent higher than the average asking lease rate nationwide of $5.05 a square foot in the second quarter. It’s substantially higher than the average asking rates in Colorado Springs, Denver, Oklahoma City and Phoenix.