Industrial Market Seen Struggling Through 2010

BOSTON-The global economic crisis will have a deeper impact on the national industrial sector than any recession since the late 1980s, claims the Spring 2009 Industrial Forecast from Torto Wheaton Research (TWR). According to the report, availability rates will continue to increase, new development will be limited and rents, revenues and property values will decline.

While the report indicates last year’s pace of deterioration did not match that of the ’01 recession, in which availability rates rose by 320 basis points in a 12-month period, it predicts the current downturn will surpass the previous three recessions in duration and severity. Making all this bad news worse, says TWR senior economist Laura Stone Mortimer, is that the bottom is still a ways off.

“With our estimate that we are just over halfway through this recession in terms of job losses, prospects for weak industrial demand extend well into 2010,” she says. “It will be quite a while before the economy can begin its recovery and employers once again add to their payrolls. Under these assumptions, we expect absorption to decline through 2010 and availability to exceed its 2003 peak of 11.7%.”

According to Stone Mortimer, the depth of the predicted drop in demand is unprecedented and, if realized, its effects will reach to all types of industrial markets. She says the hardest-hit region will be the Midwest, but manufacturing-driven markets, consumer-driven import markets and markets whose expansion was strongly tied to the housing boom will also suffer, no matter what region they are in. “Overall, about one half of the largest industrial markets covered by TWR will surpass their previous availability peak by year-end 2010,” she says.

The report indicates almost all regions will have record high availability rate, but the impact will be most pronounced in Arizona and Florida due to their exposure to the collapse of housing and retail development. Last year n 2008, the two markets experienced the largest contraction in warehouse rents since 1990. Conversely, areas in which residential fundamentals remained more balanced, including many supply-contained East and select West Coast markets, are experiencing more modest declines in rent.

However, TWR says many previously high-performing interior markets, including Texas, are now being plagued by a shrinking manufacturing sector and slowdown in global demand for US-made goods. “When oil prices surged in 2008, a drive to cut transportation costs benefited many well-positioned interior markets as supply chain restructuring resulted in demand for smaller distribution centers closer to transportation and population hubs,” Stone Mortimer points out. “The subsequent plunge in oil prices and decline in corporate profits is delaying this strategy and markets that 12 months ago were benefiting from the shift are now languishing.”

In Stone Mortimer’s view, the recession will continue to present challenges to industrial landlords well into next year, but she says the fact the US will continue to play a vital role in the globalization of trade bodes well for industrial fundamentals over the long run.