C&W reports leasing activity fell 12.7% to 208.7 million square feet for the first three quarters compared to the same period last year. It also reports negative absorption of 8.8 million square feetfor the quarter, the first time in five years the figure has not been in the positive column. The contrast between this year and last is particularly striking, as the market showed 66.1 million square feet of positive absorption for Q3 2007.

G&E agrees leasing activity has fallen, but it calculates positive absorption of 13.4 million square feet for the quarter, a slight improvement from Q2 but a third the pace set a year ago. By its estimation, the figure would have been even higher were it not for completion of 31.2 million square feet of new space.

Despite the divergent stats, both firms show approximately the same overall vacancy level, though, somewhat surprisingly in light of its finding of negative absorption, C&W pegs it lower than G&E. The former has it at 8.1%, while the latter has it at 8.5%. According to C&W, this is the highest rate in 10 quarters.

Regarding rents, because C&W gives separate figures for each industrial subcategory, while G&E uses an overall average, it's difficult to tell whether the firms agree on rent levels. In any case, the former gives annual averages of $10.06, $5.69 and $5.01 per square foot, respectively, for flex, manufacturing and warehouse space, and the latter finds an overall annual asking rate of $5.75 per square foot, a decline of two cents over the prior four quarters. G&E hazards the small size of the decline indicates rents have flattened.

The firms agree new construction will hamper market improvement, but G&E points out the current construction pipeline of 93.4 million square feet not only represents an 18% drop from the previous quarter but is also the smallest total in more than three years. In C&W's view, new construction starts will continue to taper off, with many proposed spec projects put on hold indefinitely.

As for the future, G&E forecasts the recent shocks to the credit markets coupled with worsening economic data signal that the market will face several more quarters of softening before hitting bottom. The report says store closures and falling retail sales, a rapidly weakening manufacturing sector and a slowdown in global demand for US-made goods and equipment show the key drivers of industrial space demand are all flashing red

Even more importantly, warns Robert Bach, G&E chief economist and senior vice president, the high price or absolute lack of credit is playing havoc with corporate balance sheets, pushing tenants to slash costs. He describes commercial real estate as a lagging indicator, meaning that even if the economy begins to grow again in the second half of 2009 – in his opinion, about the earliest that can be hoped for – leasing market conditions are unlikely to improve until 2010. And the improvement may be tepid even then, he adds.

"In the coming decade, the industrial market should perform well with a host of demand drivers waiting in the wings to fuel economic growth when credit begins flowing again," he remarks. "But in the next few quarters, market conditions are likely to be challenging."

The C&W report comes to much the same conclusion, maintaining the market will remain soft for at least another 12 to 24 months. At the same time, it says industrial will fare well compared to other commercial real estate sectors because it can respond more quickly to changes in demand given its shorter lease terms and construction cycles.

"Although sales and leasing have slowed from last year, market fundamentals will improve more quickly in the industrial sector than the office sector," observes Michael McKiernan, C&W's executive managing director, US industrial brokerage. "Nonetheless, industrial users will still be challenged to operate more efficiently in the short term during this volatile economic cycle."

Instant Insights /

Q3 Reports Reveal Sector Faces Challenging Times

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