Shrinking Supply for Industrial Product

TUCSON-Demand pressure on dwindling supply and a shift to a landlord's market were the hallmarks of a busy industrial sector during the first half of 2006. According to reports issued by Picor Commercial Real Estate Services and CB Richard Ellis Group Co., vacancies have stabilized, and then some, while rents are sliding upward.

According to the Picor report, total inventory hung at 15.7 million sf, with 914, 396 sf having been absorbed, translating to a 93% overall occupancy rate. Lease rates average between .40 per sf triple net and $1.10 gross per sf. The CBRE report points to a 7.78% vacancy, down slightly from the 7.87% from end of year 2005. The report placed overall gross rentable area at 33.7 million, with a 361,124-sf net absorption and an average lease rate pegged at $6.60 per sf.

In any other market, a shrinking supply would be a boon to developers. However, experts in the area tell GlobeSt.com that barriers to entry and rising construction costs are discouraging developers from planting more industrial space in the area.

"New construction costs are still so high, even though rents are increasing, they don't justify a decent return on a new development," says Robert Glaser, principal, industrial properties, with Picor in Tucson.

CB Richard Ellis-Tucson's first vice president William DiVito agrees, adding that the current rent increase still doesn't cover developer costs. "Rents are up 3.5% from last year," he explains. "But to support new construction, rental rates will need to increase between 25%-30%."

Glaser and DiVito agree that while for-lease is on the downside, build-to-suits and for-sale industrial condos seem to be the hot ticket these days. "I think the developers are trying to capitalize on the craze-to-own in this area," DiVito comments. "There's a limited amount of for-lease new construction," Glaser adds.

By the same token, investors--both in-town and out-of-state--are trying to take advantage of available product and non-existent concessions for a steady income stream. "If they find them, they snap it up," DiVito says. "The new benchmark is, if they can do it below replacement costs, they'll consider buying."

Though the shortage of industrial supply is bothersome, neither broker sees it as a long-term phenomenon. Construction costs are bound to come down at some point, Glaser says, though the economy isn't quite there yet. DiVito agrees, adding that as single-family housing construction drops, more labor and material will be available. "When that comes down, there'll be more materials and more labor to build, so all those costs should come down," he adds.

For the time being, however, shortages are the norm, with little vacancy available. "I think we'll see a continuation of good economic growth within the community, but absorption will decrease because of lack of space available," Glaser says.