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CHICAGO-The industrial market saw an increase in activity in Q2 from companies looking to take advantage of a tenant’s market. That boost, however, wasn’t enough to turn the tide as occupancy continued its downward slide to 88.4%, down 20 basis points since Q1. New construction, asking rents and investment sales all dropped further by mid-year, according Grubb & Ellis’ Q2 industrial market report.

“We’re seeing more activity than we did in Q1 as far as more users in the marketplace looking around, but it doesn’t necessarily mean that actually translated into deals,” Chris Lydon, SVP, who leads Grubb’s Chicago Industrial Group, tells GlobeSt.com. “The fourth quarter of 2008 and first quarter of 2009 were very quiet. Now you’re seeing some pent up demand from users who want to go out and at least see what’s out there and get educated about what’s on the market.”

Average asking rents fell by 5.2% to $4.84 per square foot net in the first half of 2009, a rapid drop which follows a 3.2% decrease through all of 2008, according to Transwestern’s mid-year research. Industrial investment sales have also taken a significant hit. Sales totaled only $227 million at mid-year 2009 as compared to $802 million at mid-year 2008, Transwestern reports.

“There are some investors out there with capital, but they’re still on the sidelines waiting, because they think the prices are going to drop even further,” Lydon says. “The decline in values has definitely slowed, but we’ll still see some values drop and sales prices are going to continue to come down.” However, Lydon says, taking advantage of market conditions may be easier said than done for some.

“We’re going to see buyers who have the ability to actually close on transactions – whether they’re users or investors – be in a great spot,” Lydon says. “Cash is king and if you can get a deal financed, you’ll be in a good position and able to leverage market conditions to get some great buys for the next six to 12 months. Tenants will continue to benefit from a soft market and very aggressive deals from landlords.”

Construction too has seen a stark contrast in volume from last year. Only 1.3 million square feet is underway now – a figure nine million square feet less than the amount in progress just a year ago, Transwestern’s research says. New construction is dominated by build-to-suit development, a trend evidenced by the fact that the largest current project is a 587,000-square-foot BTS for Gordon Foods to be delivered this fall in southeastern Wisconsin’s Kenosha.

“The capital markets are having such an impact on our industry in that developers are not building spec projects because of the capital markets and credit issues,” Lydon says. “It’s so hard to get deals done these days, which makes spec development pretty much nonexistent at this point and unlikely for the entire year. It’s all going to be build-to-suit projects that you’re going to see from a construction standpoint.”

Grubb’s research indicates that sale-leaseback deals are on the upswing as companies look to free up capital for other investments. “We’re going to see corporations impacted by the credit crunch looking to get real estate off their books and there might be good opportunity for sale-leasebacks in the next twelve months,” Lydon says. “If their lines of credit have been lowered or they need some capital, the sale-leaseback will be a nice option to generate some cash for companies and get a liability of their books. I think we’ll see more of these transactions in the marketplace.

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