According to Lee & Associates, industrial vacancy dropped in Q1.<@SM>However, industrial absorption slowed, due to seasonality trends.

PHOENIX-Lee & Associates’ Q1 Industrial Market Report shows what appears to be a recovering economy with vacancies dropping by 80 basis points to 11.9% and 5.7 million square feet under construction. The only potential flies in the ointment were sales volume (which dropped to just under 80 million square feet versus the more than 100 million square feet trading hands in the previous quarter) and absorption, which stood at 1.5 million square feet, which is down from the 1.9 million square feet reported during Q4 2012.

Lee & Associate senior research analyst Matt DePinto says he isn’t too concerned about absorption, pointing out that the numbers are seasonal. Furthermore, while there is still forward momentum in leasing, DePinto tells that activity within the smaller spaces – between 30,000 square feet and 70,000 square feet – has also seen a slowdown. “Some of the smaller companies that scaled back or went back to their garages are looking for space and looking to lock those deals in,” he says. The large-use activity is also strong. “It’s the mid-range space that’s struggling,” DePinto observes.

What’s interesting to observe with this report is the amount of construction underway – as mentioned above, 5.7 million is in the pipeline, well up from the 4.8 million reported during the previous quarter and the 4 million being built during the same time last year. DePinto points out, however, that the projects in the pipeline and going north aren’t frivolous ones. “The construction actually in the pipeline right now is demand-driven,” he says. “Developers are looking at each project, and as it fills out, they look at the numbers, pencil it out, then determine if more need to be built.” Much of the product going north is in the southwest valley because of the infrastructure, he adds. Furthermore, much of the construction continues to be build-to-suit versus speculative.

Based on what he’s been seeing, DePinto predicts a remaining strong year for industrial product. Though some things slipped during Q1, he’s optimistic that more activity will take place during the rest of the year. “Overall, things are looking very good,” he comments.