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CHICAGO-The US industrial vacancy rate suffered its biggest increase since at least the mid 1980s. According to the Q1 national industrial report from Grubb & Ellis, vacancies rose 70 basis points from January through March, the largest single-quarter gain in the survey’s 22-year history. The rate topped out at 9.5%, the highest level in 4.5 years.

Grubb attributes the change to negative net absorption of 40 million square feet, which marked yet another record, the largest quarterly decline of the decade. What’s more, the volume of leasing activity fell 35% from Q4 and 41% from Q1 ’08, while the average lease term of 44.2 months and size of 23,260 square feet were the lowest readings of the decade.

The report says the warehouse/distribution sector accounted for more than half the negative absorption and 85% of new space delivered in the quarter. As a result, vacancies rose by 110 basis points for that segment. By contrast, the vacancy level for R&D/flex space and general industrial space increased by 70 basis points and 10 basis points, respectively.

Though the brokerage reports asking rental rates fell only slightly, it notes that effective rates fell sharply. The former, which stood at $5.57 a square foot per year triple net, was down a mere 1% from Q4 and 3% from Q1 ’08, but the latter was 15% below the level recorded a year ago, as landlords rewarded tenants with generous concessions.

As Grubb vice president and chief economist Robert Bach points out, changes of these magnitudes are not uncommon in the office market, but the industrial market typically changes more slowly. “The big increase is a sign of extreme weakness in the drivers of demand for industrial space—consumer and business spending, falling business inventories,shrinking global trade and the troubled manufacturing sector,” he writes in the report.

According to Bach, the plunge in net absorption and rapid increase in vacancies call into question the traditional view that the industrial market is more resilient than other real estate sectors. In particular, he says, big vacancy jumps in Arizona, Nevada, Florida and parts of California reveal how closely the fortunes of the industrial market are tied to the health of the housing market.

Looking toward the future, the report predicts the vacancy rate will almost certainly exceed the 10.1% peak that followed the ’01 recession, but it most likely will top out below the 13.7% peak after the recession of the early ’90s. Grubb expects the market to hit bottom in the second half of next year and begin a sluggish recovery the year after.

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