Storing Up an Upturn

Storing Up an Upturn

Copyright 2004, Traffic World, Inc.

In a forecast offering critical support for the nation''s improving economic health, vacancy rates for warehouse and distribution sites are set to fall this year, says industrial facilities provider ProLogis.

Demand for warehouse space "is on the verge of recovery," ProLogis said in its first biannual U.S. Property Market Review, which examined the top 30 distribution and warehousing markets in the United States.

It is just a matter of time "until the nationwide vacancy rate begins to head south," said ProLogis.

But just as growth forecasts for the overall economy are tempered by uncertainties, "we don''t see dramatic, overnight improvement in the distribution/warehouse markets," the company said.

ProLogis estimated that 70 to 75 million square feet of new warehousing space were delivered in the top 30 markets during 2003. That is equivalent to a 1.6 percent increase in total inventory, the company said.

Although a growing economy should bolster demand for storage space, it takes six months to a year for the market to react. The report is based on data collected through mid-2003, but ProLogis said demand for the second half of 2003 was expected to be only a shade higher than the anemic 0.3 percent estimated for the first half of the year. Warehouse vacancy rates probably peaked at the end of the year at 11.5 to 12 percent, the company said.

With a strengthening leasing market, developers this year will try to ride the upswing so "starts and deliveries are likely to ratchet higher." Even at 2003 projections, a "sizeable" increase in delivered space of 1.5 percent is predicted for 2004. Total new starts in 2004 are expected to climb to 73 million square feet, 10 percent above the projected level for last year.

Demand for space is expected to increase by 2.5 percent this year. ProLogis believes this should translate into a 75-to-125 basis points fall in the facility vacancy rate during 2004. Positive news for users is that prices will not rise immediately as space availability tightens. "It will probably take a year or so of tightening before landlords have gained enough leverage to begin raising their effective rents," Prologis said.

The likelihood of rent increases is tied to the health of each market. As ProLogis pointed out, the economic pain of the last few years has not been spread evenly across all the 30 markets it analyzed.

"Austin, Louisville, and San Francisco''s South Bay (Silicon Valley) stand out as the hardest-hit markets," said the company, while the Los Angeles Basin, New Jersey and Washington, D.C., fared better.

Predicting which markets will recover fastest is tricky. A statistical yardstick called "Years of Excess," which basically gauges how readily a market can absorb excess capacity and return to a "normal" growth pattern, is one measure. Using this yardstick ProLogis ranks the 30 markets covered in terms of the rate at which they are expected to rebound. The top two markets are Reno and the L.A. Basin, followed by Las Vegas and New Jersey. The two weakest markets are San Francisco''s South Bay and Louisville. These latter markets will "likely be among the last ones to recover fully," ProLogis said. Other laggards are Dallas, Baltimore and St. Louis.