NAIOP: Industrial market has worst showing in memory, and vacancies still increasing
by Burl Gilyard Staff Writer
On Thursday afternoon, local real estate brokers gathered at a nice suburban hotel to assess the current state of the industrial property market. They told jokes. They showed brief clips from the movies “Office Space” and “Billy Madison” for comic relief. They brought in a state official to tout Minnesota’s robust business climate.
But nothing could gloss over the ugly facts: the industrial market had a terrible year.
The 2009 Industrial Market Report from NAIOP, formerly the National Association of Industrial and Office Properties, showed that the market posted 1.73 million square feet of negative absorption, the worst showing for the market that anyone can recall.
Vacancy shot up from 9.4 percent a year ago to 12.5 percent.
Development is at a cricket-chirping standstill: there are no multi-tenant industrial projects currently under construction anywhere in the metro.
“This is the first time in recent memory that there is absolutely no new construction going on,” said Craig Patterson of Minneapolis-based CSM Corp., who moderated a panel discussion on the new numbers.
Patterson noted that recently completed industrial projects are sitting half empty with a vacancy rate of 48 percent.
“The worst may be yet to come,” said industry veteran Michael Smith of Cushman & Wakefield.
Smith noted that 18.5 vacancy rate in the southeast market was the highest in that area since 1992.
Brokers noted a looming amount of shadow space – commercial real estate currently being leased, but not being used, by tenants. Those numbers don’t show up in market reports, but brokers on the street know it’s a signal of more pending vacancy.
The market has been hit by the rocky economy, with some companies going out of business and many others downsizing and cutting back on the amount of space that they lease.
Absorption, a standard gauge of the health of a market, measures the change in occupied space from one reporting period to the next. A year ago, NAIOP reported positive absorption of 1.58 million square feet.
That puts the swing between this year and last year at a drop of 3.3 million square feet in leasing activity.
The report tracks activity through May 1. MNCAR (Minnesota Commercial Association of Realtors) provides the data for the report.
The program’s attendance was notably down from a year ago, another sign of the tough climate for the commercial real estate industry.
In the current rough climate, landlords are scrambling to shore up their properties and retain tenants.
“Landlords need to roll up their sleeves,” said Dave Paradise of NorthMarq.
Many landlords are offering deals including free rent or reduced rent for tenants and other incentives. Property owners are also cutting so-called “blend and extend” deals wherein the landlord gets a commitment for an extended lease period and the tenant gets a break on the rental rate.
Brian Netz of NAI Welsh summed up the current market with a sobering medical analogy: “It truly is triage out there right now,” Netz said.
