"We're sensing a palpable level of negative sentiment in thewarehouse leasing market at the present moment," says Ross Moore,senior vice president and director of market & economicresearch at Colliers. "That said, many markets continue to postvery strong fundamentals."

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Of the 50 markets Grubb tracks in detail, 32 posted rising Q1vacancy rates, while 18 posted declines. Among large US markets,vacancy was lowest in land-constrained and trade-fueled Los AngelesCounty at 1.6% and highest in Memphis at 16.1%. Markets postingvacancy increases over one percentage point during the quarterincluded California's Inland Empire, Nashville, Las Vegas, OklahomaCity and Phoenix. Only two markets, Sacramento and NorthernIndiana, saw their vacancy rates decline by more than a percentagepoint.

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But according to Colliers, despite the rival firm's finding of adecline in Northern Indiana, the Midwest markets in general wereamong the strongest in terms of healthy absorption levels thankslargely to growing export demand for US-made machinery and parts."The export sector remains a bright spot, and going forward, wewill keep vigilant watch on the housing market, retail sales andmarkets linked with the booming commodities sector," saysMoore.

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Grubb senior vice president and chief economist Robert Bachagrees the nation's export sector provide's the market's savinggrace. According to Grubb, exports were up nearly 21% in dollarvolume from February to February. "The economy appears to be poisedon the cusp of a recession if not already in one," he says. "Arecession certainly is not good news for commercial real estate,but thanks to global growth and the weak dollar, exports arebooming... Exports help manufacturers in particular, while globaltrade in general creates demand for warehouse-distributionspace."

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Both brokerages attribute the increase in vacancies to thedelivery of a large amount of new space. By Grubb's account,warehouse completions totaled 37.4 million sf, versus 21.1 millionsf absorbed. Colliers calculates total industrial completions at46.1 million sf. Though the figure was 17% below the 55.5 millionsf completed in Q4, it was 25% above the 36.8 million sf total forQ1 '07.

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Both firms also foresee the pattern continuing through the restof the year. "The construction pipeline is set to deliver some 121million sf of space over the next few quarters, a period duringwhich demand for that space will be lack-luster," Bach observes,adding he expects the vacancy rate to end the year between 8.5% and9%. According to Colliers, 36 warehouse markets saw vacancies go upin Q1, while 15 saw them decrease.

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According to Grubb, while rental rates increased sporadicallyduring the just-ended expansion cycle, overall gains were muted.The brokerage points out the average asking rate for warehouse anddistribution space has risen only 10% since bottoming out in Q2'04. It pegs asking rates for all types of industrial space at$5.87 per sf triple net, a 2.3% gain over the same period lastyear. Colliers pegs rents at $5.69 a sf.

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"Soft market conditions will likely bring a period of flatteningrental rates, where the average inches up one quarter and down thenext," says Bach. "Overall, growing international trade is likelyto rescue the industrial market from the worst effects of theeconomic downturn, be it a recession or just very slow growth thatfeels uncomfortably like one."

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