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CHICAGO-The volume of US industrial transactions plunged 56% last year, according to new data from Jones Lang LaSalle. In the firm’s US Industrial Report Winter 2009, which was released at the end of March, researchers reveal that only $21.7 billion of industrial sales occurred last year, compared to $49.7 billion the year before. Furthermore, they note the trend worsened as the year wore on, with Q4′s total of $3.1 billion in transactions down 69% from a year earlier.

Though the report points out the industrial sector fared better than office and retail, it attributes the performance advantage to a smaller average transaction size, which made debt financing more accessible, rather than the sector’s inherently greater strength. In addition, because industrial volumes and values did not experience as large a surge as other sectors during the recent boom, they also didn’t suffer as large a fall.

According to the report, debt availability for industrial transactions remains significantly constrained, with banks continuing to tighten loan standards and lending spreads remaining high. The report’s authors note that 79% of respondents to the Federal Reserve’s January survey of senior loan officers reported tightening standards for commercial real estate lending. Additionally, the survey found that demand for loans remains very weak. Furthermore, the disappearance of the CMBS market has reduced commercial mortgageavailability, with prospects dim for a return of that market for the foreseeable future.

According to JLL, total US industrial vacancy increased 110 basis points last year to 8.9%, the highest level since the market began recovering from the last economic downturn in late ’04. The vacancy rate for the distribution and warehouse subsector is even higher at 12.3%. At the same time, the report notes some positive trends that may keep vacancies from spiraling skyward. First, unlike the office market, the industrial sector has not experienced a dramatic upswing in sublease vacancy.

Second, an abatement in construction financing combined with higher construction costs has sharply reduced the construction pipeline, preventing the type of overbuilding that hindered the last period of recovery. On the other hand, speculative construction has left certain key logistics submarkets with excess capacity that will be difficult to burn off before late next year.

The report says average asking rents, which had remained flat from Q2 ’07 through Q3 ’08, began to trend slightly downward at the end of the year, dropping from about $5.05 a square foot to $4.95 a square foot. But real rents have probably dropped further, with deals being done at discounts of 10% to 20% of the quoted rent. Rising vacancy levels and lowered demand have resulted in increased competition among available product, which threatens to push rents lower this year. Despite rising lowered demand overall, JLL researchers say demand remains comparatively strong for sites and submarkets that provide efficient multi-modal access, especially rail-served projects near higher population densities.

In the opinion of JLL researchers, the industrial real estate market will have the opportunity to recover sooner than other real estate sectors provided manufacturing, production and distribution operations continue to seek greater efficiencies and remove friction from worldwide supply chains. They predict the current year will nonetheless be challenging, with leasing activity continuing to weaken and additional consolidation driving vacancy higher.However, they add, as the market bottoms there will be opportunity for well-positioned occupiers as well as investors. They say port cities and markets located on major national distribution networks may be particularly well positioned to immediately profit once consumer demand picks up momentum.

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