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NEW YORK CITY—More than $700 million worth of industrialproperties fell into trouble in February, increasing the totaloutstanding distress to $6.8 billion by the end of March, accordingto the latest Real Capital Analytics figures. Workout activity ofjust $58 million did little to offset the second largest monthlyincrease this cycle in distress inventory for industrialproperty.

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But the sector is still faring considerably better than otherasset classes—with office, retail, apartment and hotels postingdistress figures between $25 billion and $33 billion. What's more,industrial accounts for only around 5% of outstanding CMBSbalances. The sector's strength is due largely to a lack of hotmoney in the market during real estate's mid-2000s heyday and awillingness to work through troubled loans. But it's also leftinvestors cooling their heels on the curb with few purchasingprospects.

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Even February's jump in troubled assets is partially due to theaddition of two $100-million portfolios to the distressedinventory—a 12-property portfolio in the Midwest, which is owned bya joint venture between the Mirvac Group and James Fielding FundsManagement, and a second six-property, Kirkman KennedyEdgewater-controlled bundle in Orlando and Memphis.

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"Most of the trouble that is currently in industrial property isconnected to economic factors such as lost tenants rather thanactual debt," says New York City-based RCA's senior market analystBen Thypin, who believes that industrial will continue to stay onthe low end in terms of distress.

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The fundamentals are better for industrial, agrees ConradAndersen, EVP and managing director of financial services assetsmanagement at Grubb & Ellis Co. in Newport Beach, CA. "Althoughthe port business has been impacted, most industrial product islocated in key submarkets where there wasn't oversupply," he says,adding that the vacancy factor, pre-downturn, was in thesingle-digits and in some cases as low as 1%.

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Unlike office, industrial investors were not accumulating trophyproperties and then flipping them into a large portfolio."Industrial buildings are often more prosaic," says Thomas A. Fink,managing director of New York City-based commercial mortgageresearch provider Trepp. "These properties do not tend to be trophybuildings. There are only so many people in the world who getexcited about 30-foot versus 35-foot clear heights."

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But that is not to say there is no stress in the market...

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