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Perched at an equilibrium point between supply and demand, the industrial market is in a good position to weather the slower economic conditions expected in 2008. The industrial construction pipeline takes less time to empty than other property types, meaning that developers and lenders can pull back before the market becomes seriously overbuilt.

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

If the economy remains slow as expected over the next few quarters, it could temporarily boost demand for warehouse space because importers and manufacturers will need to store their excess inventories until sales catch up. A combination of continuing demand, moderately tight market conditions and new construction charging premium rental rates should be enough to push the average asking rate for available warehouse/distribution space up 2% to $4.70 per sf per year triple net by year-end 2008. Asking rents are expected to increase by 10% or more in just two markets – San Jose and Oakland/East Bay, Calif., – compared with 15 markets in 2007.

Markets expected to post rent gains of 5% to 10% in 2008, still a very healthy rate of growth, include Houston, Memphis, Kansas City, the Inland Empire in Southern California, Jacksonville, FL, and Raleigh/Durham, NC, plus a handful of smaller markets. At the other extreme, several markets expect asking rents to decline in2008, though the declines will be confined to the low single digits. Markets in this category include Cincinnati; St. Louis; Sacramento, CA; Nashville, TN; Detroit and Atlanta.

]The average asking rental rate for R&D/flex space is expected to rise 2% in 2008, ending the year at $10.64 per sf. Fuel costs, infrastructure issues and the overall economy will drive the logistics market in 2008 and beyond. Trucking companies reported lower earnings in the third and fourth quarters of 2007, and bankruptcies are up. Although rising fuel costs played a role, the weak earnings could be a precursor of a slowdown in the economy.

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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