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Wednesday, August 17, 2011

Industrial Real Estate Review and Outlook – Mid-Year 2011

By Michael Fonda (Chicago)

On July 29th, CoStar presented its Mid-Year 2011 Industrial Real Estate Market Review and Outlook for the United States. Jay Sivey, Hans Norby and Shaw Lupton, from CoStar, were the presenters. If you have access to CoStar, you should view this presentation. You can do so by going to CoStar’s home page and clicking on the tab on the far right – Knowledge Center. Then click on CRE Market Reviews. Select the particular “Session” that interests you. My specialty at Avison Young is Industrial Real Estate, so I went there.

My takeaways from the CoStar presentation are that: a) occupancy levels will continue to increase b) developers and their capital partners will continue their reluctance to create new supply and c) industrial real estate investors are willing to accept less of a return on their investments today than they were in 2008 and 2009.

Net Absorption: Net absorption has finally turned positive. CoStar is reporting approximately 94 million square feet (msf) of net absorption so far in 2011. Hamid Moghadam, CEO of Prologis (world’s largest industrial Real Estate Investment Trust with 600 msf of space worldwide), reported in Prologis’ latest earnings call that Prologis is projecting 150 msf of net absorption in 2011.

Supply: Total inventory of industrial real estate in the United States is a little over 20 billion square feet. Average annual deliveries of industrial real estate are 2.5% of inventory or approximately 500 msf. Since 2009, annual deliveries have been more like 30 to 40 msf or .02% of inventory. We lose, on average, 1% of industrial real estate inventory every year or 200 msf. We aren’t even close to replacing this inventory.

Distressed Sales: According to CoStar, distressed sales as a percentage of total sales increased sharply beginning in 2008. That trend has plateaued and is now starting to reverse itself.

Forecast: A good case can be made for increased absorption outstripping decreased supply, resulting in higher rents for industrial real estate by the end of 2012. Unfortunately for Chicago and the Midwest, there is a slight problem. That problem is articulated by Michael Barone in yesterday’s Wall Street Journal. To quote Barone, “The Midwestern (economic) model is unraveling before our eyes.” The good news is that the Midwest is voting the Old Guard out and replacing them with more forward looking leaders. Though it may take the Midwest a bit longer to share in the positive momentum beginning to develop in other regions of the U.S. industrial real estate market, we’ll get there.

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