Nevertheless, with space under construction at a cyclical peakas of year-end2007, there will be enough supply coming online in2008, particularly in the first half, to push vacancy higher.Expect vacancy to end 2008 at 7.8 %, a modest increase of 20 basispoints from year-end 2007. This assumes net absorption totaling 120million sf in 2008, down 14% from 2007, against space completionstotaling 160 million sf, an increase of 7% from 2007.

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If the economy remains slow as expected over the next fewquarters, it could temporarily boost demand for warehouse spacebecause importers and manufacturers will need to store their excessinventories until sales catch up. A combination of continuingdemand, moderately tight market conditions and new constructioncharging premium rental rates should be enough to push the averageasking rate for available warehouse/distribution space up 2% to$4.70 per sf per year triple net by year-end 2008. Asking rents areexpected to increase by 10% or more in just two markets – San Joseand Oakland/East Bay, Calif., – compared with 15 markets in2007.

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Markets expected to post rent gains of 5% to 10% in 2008, stilla very healthy rate of growth, include Houston, Memphis, KansasCity, the Inland Empire in Southern California, Jacksonville, FL,and Raleigh/Durham, NC, plus a handful of smaller markets. At theother extreme, several markets expect asking rents to declinein2008, though the declines will be confined to the low singledigits. Markets in this category include Cincinnati; St. Louis;Sacramento, CA; Nashville, TN; Detroit and Atlanta.

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]The average asking rental rate for R&D/flex space isexpected to rise 2% in 2008, ending the year at $10.64 per sf. Fuelcosts, infrastructure issues and the overall economy will drive thelogistics market in 2008 and beyond. Trucking companies reportedlower earnings in the third and fourth quarters of 2007, andbankruptcies are up. Although rising fuel costs played a role, theweak earnings could be a precursor of a slowdown in theeconomy.

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This is an excerpt from Bach's 2008 Real Estate Forecast.Bach is a senior vice president and the chief economist at Grubb& Ellis.

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