Industrial Overview
This edition of the Coldwell Banker Commercial® Viewpoint: National Industrial U.S. Market Trends provides key information regarding significant trends and developments in the commercial real estate industry for the United States.

National Industrial Overview

· Demand regained the lead over new supply during the latest quarter. Increasing construction activity, however, adds uncertainty to the future disposition of supply and demand.

· While vacancy held steady during the quarter, rent growth continued to slow.

· As in other sectors, investment sales volume in the industrial market slowed during September. Still, volume for the quarter was up year over year.

National Supply and Demand

Reversing the situation of the previous quarter, net absorption of 34.9 million square feet exceeded new supply by 4 million square feet. This favorable balance, however, may not persist. While both delivery and net absorption sums contracted during the latest quarter, the volume of space under construction is expanding rapidly: CoStar reports 183.3 million square feet of industrial properties being built nationally, up 4.1% from the last quarter and 6.7% year over year. Clearly, demand for warehouse and flex space will need to keep pace in order for the market to maintain its generally good health.

· The South, with its 22 markets, claims 76.7 million square feet under construction at quarter’s end, up 11.6% from a year earlier. Dallas, Houston and South Florida are the most active builders at present.

· The West follows with 58.1 million square feet under construction. Activity here, however, runs more evenly. Current activity is down 0.2% from third quarter last year. With 28.2 million square feet underway, the Inland Empire with its huge logistics projects accounts for nearly half of the region’s activity. Slowing net absorption here is raising some concerns, however.

· Only the Midwest recorded a decrease in construction activity during the quarter. Net absorption, at 14.4 million square feet, was up 67% for the period and nearly doubled the gains from the last quarter. Sizable increases were posted in a number of regional cities, including Chicago, Detroit and Cincinnati.

National Vacancy

The vacancy rate for the U.S. industrial market held steady at 8.4% during the latest quarter and has shown little movement over the past year. While rates in the Northeast and Midwest showed small increases during the quarter, rates were unchanged in the South and West. Much greater variety with respect to vacancy levels and quarter-to-quarter performance, however, is witnessed among individual cities.

· The West’s persistent 6.2% rate, lowest in the nation, included an 80-bps decline in Salt Lake City, to 4.0%. Rates in Los Angeles and Orange County run at 3.0% to 4.0%, roundly stated. The Inland Empire’s 7.3%, unchanged for the quarter, is up 200 bps from two years ago.

· Led by a 150-bps increase to 9.1% in Nashville, 14 of the South’s 22 markets saw their rates rise during the quarter. Rates are lowest in Miami and Fort Lauderdale, at 4.7% and 5.0%. The region-wide rate is 8.5%.

· Vacancy in the Midwest decreased from 9.6% to 9.4% during the quarter. Led by substantial declines in Cincinnati and Dayton, eight of the region’s 16 markets saw their levels drop.

National Rents

Rents moved up slowly overall during third quarter as the national average added eight cents to close the period at $6.28 psf. The year-over-year gain, however, is more substantial at 5.8% according to CoStar’s data. This period’s slowdown in growth includes a one-cent loss in the Midwest, but also a 21-cent or 2.5% rent increase in the West.

· The West’s regional high rent level of $8.59 arises in part from high land and construction costs and an abundance of flex space in the regional inventory mix. Averages lease rates in the revived San Francisco Bay area run as high as San Jose’s $13.55, the nation’s highest average.

· A 1.4% increase in the South produced an average of $5.87 psf. A mix of performances among major markets ranged from a 6.6% increase in Charlotte to a 4.8% loss in Raleigh-Durham.

· The Midwest’s overall flat performance over the past year includes similarly flat performances in many of its major markets, including Chicago, Minneapolis, Kansas City and Detroit. The regional average is $4.55 psf.

National Investment Sales

Industrial sales activity suffered the same fate as other property types as turmoil in the capital markets turned investors away by quarters’ end. RCA reports that approximately $2.6 billion in significant industrial sales closed during September well off the $3.5 billion average achieved over the previous two Septembers. In August, meanwhile, an increase in the sale of flex properties boosted that month’s volume to $2.8 billion, a 37% increase year over year. Due to the strong performance earlier in the quarter, however, sales for the period exceeded $13 billion, a 47% increase year on year. Increased uncertainty on the economic front and higher financing terms are contributing factors to increases in capitalization rates.

· Los Angeles led the U.S. in sales volume for the first nine months of 2007 at $3.14 billion as 153 properties traded hands. Average price and cap rate were $143 psf and 6.1%.

· For markets with sales volume totals exceeding $500 million over the first nine months of the year, San Diego leads in average price at $168 psf and Orange County leads in average cap rate at 5.6%.

· Major recent sales include Sovereign Group’s $150.0 million ($145 psf) acquisition from Townsend Capital of the 1.04 million square foot, 1961-built Summit Technology Center flex property in Lees Summit, MO, in suburban Kansas City.

NORTHEAST INDUSTRIAL

· A sharp reversal placed a comfortable distance between demand and new supply during the quarter. Construction remains active.

· The vacancy rate shed 20 basis points; positive growth returned to rents.

· Despite substantial increases in some areas, investment sales volume slipped 5% in the Northeast year over year.

Northeast Supply and Demand

A fortuitous combination of declining sums of construction deliveries and rising demand graced the Northeastern industrial market during third quarter. The end result, reversing the previous quarter’s imbalance, placed net absorption above new supply at 7.5 million to 2.6 million square feet. Led by Philadelphia, all but two of the region’s eight markets had positive third quarter absorption totals and all save Long Island and Westchester achieved overall gains over six months. Construction underway region-wide declined 4.3% during the quarter to 22.9 million square feet. That said, year-over-year volume has risen by 41.3%.

· Philadelphia’s 5.5 million square feet dominated regional third quarter net absorption by wide margins. Its 2.0 million square feet also claimed the lead in deliveries. Respective six-month absorption and completion sums are counted at 6.8 million and 5.4 million square feet.

· Pittsburgh, Boston and Westchester County followed with latest quarter net absorptions sums ranging from 835,000 to 870,000 square feet, roundly speaking. New supply volumes trailed substantially in all three.

· With 9.8 million and 8.8 million square feet underway, Northern New Jersey and Philadelphia together account for 81.5% of regional space under construction.

Northeast Vacancy

The ascendancy of demand over same-term new supply achieved during the latest quarter produced a 20-basis point drop in regional vacancy, to 9.6%. The rate was 10.1% four quarters earlier. Improvement aside, industrial vacancy in the Northeast remains the highest on average nationwide. Five of eight markets claim rates in the double digits; only Long Island runs under 8.0%. Four markets saw their rates decline during the quarter, two held steady and two showed increases.

· Best improvement for the quarter and year over year belongs to Pittsburgh, where respective decreases of 120 and 140 bps produced a quarter-end rate of 13.3%. With these declines, Boston assumed the dubious rank of highest vacancy at 13.5%.

· Vacancy in the boisterous Philadelphia market shed 50 bps during the quarter to close the period at 10.1%.

· Long Island’s 4.8% vacancy rate, up 30 bps since mid-year, remains the lowest in the region. Northern New Jersey and Providence were next at 8.0% and 8.1%.

Northeast Rents

Moderate rent growth for the latest quarter was a marked improvement from the loss reported by CoStar for the preceding quarter. The $6.38 psf regional average represented a 1.2% gain for the period; the gain year over year was 2.4%, well below growth rates recorded for the West and South yet still ahead of the minimal increase recorded for the Midwest. Performances by individual market were mixed with respect to growth. Losses in two markets during the quarter were accompanied by gains in all others. Average lease rates ranged from Pittsburgh’s $4.39 psf to Long Island’s $10.43 psf.

· Providence’s growth numbers are the region’s best: gains of 3.7% for the quarter and 10.4% over 12 months produced a third quarter average of $5.32 psf. Long Island recorded respective gains of 3.1% and 6.1%.

· Second-best growth year- over-year was achieved by Hartford’s 8.5% increase to $5.12 psf. That gain, however, included a 1.2% decline during third quarter.

· Boston continues to struggle. Latest-quarter and year-over-year growth rates of 0.4% and negative 1.6% are cited. The third quarter average rent is pegged at $6.74 psf.

Northeast Investment Sales

Excluding the Pennsylvania markets, RCA reports total investment in Northeast industrial properties at $3.23 billion since the year began, down 5% from the comparable period of 2006. Average cap rate and selling price, while varying considerably from place to place, register at 6.8% and $88 psf, each down slightly from the averages recorded for the first half of the year. Year-to-date sales in Philadelphia totaled $214 million, up 405% year on year.

· Boston led the region in sales volume through the first three quarters of the year at $1.17 billion. Average selling price and cap rate were $80 psf and 7.2%. Lowest cap rates were 5.7% and 6.0% in Manhattan and the New York City Boroughs.

· Northern New Jersey was one of the nation’s major distribution hubs to demonstrate “strong pricing growth” year-to-date, according to RCA. AT quarter’s end, sales prices and cap rates are pegged at $72 psf and 7.0%.

· Recent sales include Lincoln Property Company’s acquisition forapproximately $18.4 million (about $56 psf) of the 329,000 square foot Reebok Distribution Center in Stoughton in suburban Boston. Reebok Inc. was the seller.

SOUTH INDUSTRIAL

· New supply continues to outrun demand.

· While the regional vacancy rate held steady during the quarter, the longer-range trend is an upward drift. Rent growth remains positive but modest.

· Atlanta and the major markets of Texas and South Florida remain leaders in investment sales volume. South Florida markets lead in sales prices and cap rates.

South Supply and Demand

The South, with its 22 separate markets, leads the nation in industrial real estate development; it is second only to the much smaller Northeast market in rate of construction increase. The 76.7 million square feet underway, up 11.6% from four quarters earlier, account for 41.8% of all space underway nationwide. Over the latest quarter alone, the volume underway grew by 3.9%, adding 2.9 million to total activity. However, new supply and net absorption are not well aligned. The 35.5 million square feet of new product delivered to Southern markets over the past six months were paired with only 23.6 million square feet of net absorption. Respective totals for third quarter were 14.9 million and 8.2 million.

While activity levels vary from place to place, the major markets of Texas and South Florida are leaders in construction. Only the former, however, leads in absorption; the latter markets, burdened by sluggish economies and weak housing, are not producing demand commensurate with new supply.

· Dallas-Fort Worth and Houston led the South in third quarter net absorption with respective sums of 4.9 million and 3.0 million square feet. Dallas’s occupancy gains of 7.9 million square foot over six months ranks third best in the U.S. after the Inland Empire and Chicago.

· Explosive construction in Dallas-Fort Worth places 18.0 million square feet underway. Houston, Atlanta and the combined markets of South Florida claim project totals in the range of 5.4 million to 6.6 million, roundly stated.

· Delivery of 3.2 million square feet in South Florida over the past six months met with net absorption at close to zero. Significant excesses of recent new supply over same-term demand are indicated as well for Tampa Bay and the metro Washington DC market.

South Vacancy

The imbalance of new supply over demand made no impact on the vacancy curve during the latest quarter, although the 8.5% regional rate is up 20 basis points since the beginning of the year. This overall benign increase conceals greater turbulence at the local level, however. Fourteen of the region’s 22 markets experienced rising vacancy numbers during third quarter, three of which (all secondary or tertiary markets) exceeded 100 basis points. Rates vary as well, running from the mid single-digits throughout Florida to Memphis’s 17.0% national high.

· Miami’s 4.7% vacancy, up 40 bps since mid-year, marks the Southern low. Broward County and Southwest Florida are close at 5.0% and 5.4%, up 50 and 90 bps, respectively, since mid-year. Overall South Florida vacancy at 5.1% is up 150 bps year over year.

· The best performance for the quarter belongs to Greenville-Spartanburg, where the loss of 80 bps dropped the rate to 10.3%. The best performance over 12 months is San Antonio’s 250-bps decline to 7.6%.

· Dallas-Fort Worth’s recent large construction boom did not produce an increase in vacancy. Third quarter’s 9.4% rate is down 40 bps since mid-year and is down 90 bps from a year ago. Houston and Atlanta, at 6.4% and 11.0%, also enjoyed third period declines.

South Rents

Growth in rents continues to slow. At $5.87 psf, the South’s average asking lease rate was up 1.4% (eight cents) from a quarter earlier and 5.1% since the year began. As with supply, demand and vacancy, rental rates and trends differ throughout the region. Rent levels, boosted by elevated land and construction costs, run high in South Florida–even to the point of driving some users to other markets. Flex-heavy markets such as metro Washington DC and Austin also fetch high prices. Space in some Texas markets, including Dallas, and secondary and tertiary markets throughout the region, can be considerably less expensive, running well under regional and national averages.

· Charlotte’s 6.6% increase to $4.39 psf was the region’s best third quarter performance. San Antonio, Broward County and Tampa Bay enjoyed gains running from 3.2% to 3.9%.

· Year-over-year growth rates ranging from 10.0% to 12.5%, roundly stated, are indicated for the combined markets of South Florida, Jacksonville, Tampa Bay, Orlando and Charlotte.

· Highest rents for the quarter were Palm Beach County’s $10.57 psf, up 2.9%, and metro Washington DC’s $10.46 psf, up 2.0%.

South Investment Sales

Not surprisingly, the region’s largest and most prominent markets account for its largest investment sales totals. These are, broadly speaking, the major markets of Texas and Florida, greater Washington DC and Atlanta. That said, RCA notes that sales activity in greater Washington DC may be moderating. Sales volume through third quarter for the Southeast proper totals $6.34 billion. The markets of Texas accumulated $2.40 in sales. Sales in Northern Virginia, Suburban Maryland and Baltimore totaled $950 million. Average cap rates are common at about 7.0% but tend to run lower in some locales, including South Florida.

· Dallas and Atlanta led the region in sales through the first three quarters of the year with accumulated volumes of $1.31 billion and $1.13 billion. The combined markets of South Florida accounted for $852 million. Memphis, a weak market in other respects, sold $466 million in industrial assets.

· Highest average prices are indicated for Palm Beach County ($144 psf) and Northern Virginia ($114 psf). Lowest cap rate averages belong to Broward County (6.1%), Miami (6.1%), Austin (6.5%) and Charlotte (6.6%).

· Major recent investment transactions include the $46.95 million ($96 psf) acquisition by Prudential Real Estate Investors of the 489,216 square foot, 1975-built Benjamin & Thomson center warehouse property in Tampa. First Industrial Development Services Inc. was the seller.

MIDWEST INDUSTRIAL

· Supply and demand dynamics are favorable with absorption moving well ahead of new supply amid slowing construction.

· The vacancy rate shed 20 basis points during the quarter. Overall rent growth remains weak, however.

· The investment sales profile features the nation’s highest average capitalization rate and lowest average selling price.

Midwest Supply and Demand

Demand ran ahead of new supply for the past two quarters with the gap widening during the latest as delivery of 6.4 million square feet met with net absorption at 14.4 million. The volume of space under construction, meanwhile, has been decreasing. The 25.6 million square feet underway at quarter’s end were down 2.3% since mid-year and 10.5% from four quarters prior. Overall, these numbers represent the nation’s most favorable supply and demand dynamics. Looking more closely, however, the quarter’s increase in absorption can be attributed to dramatic gains in a small handful of markets, including Chicago and Detroit. Several markets with positive second quarter totals have since fallen into negative territory.

· Chicago’s 5.21 million square feet of net absorption nearly doubled the previous quarter’s total (2.85 million) and more than doubled third quarter deliveries (2.58 million). The volume of space under construction rose 18.7% to 11.1 million square feet.

· Net absorption in Detroit this quarter grew more than five-fold to 2.6 million square feet. West Michigan and Cincinnati rose from negative territory to 2.7 million and 1.6 million square feet.

· There are 2.9 million square feet under construction in both Columbus and Indianapolis. Net absorption in the latter fell sharply negative to minus 1.1 million square feet during the quarter. Columbus was strong at plus 1.3 million.

Midwest Vacancy

Midwestern vacancy decreased 20 basis points, to 9.4%, during third quarter. The 20-point year-over-year decline was the nation’s best for the period. Performances among individual markets were mixed. Eight saw their rates decline during the quarter, six suffered increases, and two remained unchanged. Nine markets were down year over year, four of which experienced declines in the range of 110 to 200 basis points.

· The quarter’s best performances belonged to neighbor markets Cincinnati and Dayton. The 90-bps declines in each resulted in respective vacancies at 7.9% and 9.6%.

· Milwaukee’s 7.8% vacancy remained fixed for the quarter but was down 200 bps year over year. Chicago’s 9.5% was down 30 bps for the quarter and 70 bps year over year.

· Lowest vacancies are indicated for Madison (6.5%), Kansas City (7.0%) and Oklahoma City (7.6%). Changes for the quarter were minimal to non-existent in these markets.

Midwest Rents

The favorable turn in the dynamics of supply and demand and the improvement in Midwestern occupancy did little to boost rent growth. Asking rents of $4.55 psf, lowest by far among the nation’s regions, was down a penny from a quarter earlier and was up only two cents (0.5%) from the comparable period of 2006. Only three of the region’s markets posted rent hikes during third quarter, and only Madison’s increase was substantial. Eight markets suffered losses while five showed no change.

· Madison led in third quarter and year-over-year rent growth with respective increases of 6.7% and 12.3%. The latest quarter’s rent was $4.92 psf.

· While no change was recorded for Kansas City, the Twin Cities or Indianapolis for third quarter, year-over-year increases were substantial at 4.9%, 4.4% and 3.3%. Respective latest quarter rents are $4.32, $6.14 and $4.05 psf.

· While Oklahoma City and St. Louis suffered third quarter losses of 2.7% and 2.9%, year-over-year rent changes remained positive at 0.8% and 1.7%. Their respective rents are reported at $3.64 and $4.76 psf.

Midwest Investment Sales

Industrial investment sales in the Midwest registered at $5.39 billion during the first nine months of the year according to RCA. At $54 psf and 7.5%, average sales price and capitalization rate were lowest and highest, respectively, nationwide. As of September, newly offered assets were averaging $55 psf and 8.0%, again the national extremes. Chicago leads in sales activity among the region’s combined tertiary markets. Only Milwaukee and Chicago among regional markets are cited by RCA for substantial growth in prices.

· Chicago’s $1.82 billion in sales involving 136 transactions through September amounted to 33.7% of the region’s activity. Chicago’s 7.0% cap rate is the lowest in the region.

· Kansas City and Cincinnati led the region in average sales price at $73 and $67 psf involving 12 and 19 transactions, respectively. Their cap rates are recorded at 7.9% and 7.3%.

· Recent significant deals include Sovereign Group’s acquisition from Townsend Capital of the 1.04 million square foot, 1961-built Summit Technology Center flex property in Lees Summit, MO, in suburban Kansas City. An approximate selling price of $150.0 million ($145 psf) was reported.

WEST INDUSTRIAL

· Accounting for nearly half of all current construction, the Inland Empire remains dominant in the region. Concerns with respect to oversupply have arisen here.

· The West leads by far in rates of rent growth with numerous markets seeing double-digit year-over-year increases. Vacancy remains low overall.

· Investment sales have held up well. Los Angeles leads in sales volume, while San Diego leads in price.

West Supply and Demand

Industrial construction continues to intensify. The 58.1 million square feet underway at the close of third quarter were up 1.6% from a quarter earlier and 14.7% since the year began. Deliveries, meanwhile, continue to exceed same-quarter net absorption. Respective totals for the period according to CoStar are 11.0 million and 9.0 million square feet. Regional statistics, however, are skewed greatly by the massive volumes of construction underway and projects recently completed in the Inland Empire, as described below.

· The 28.2 million square feet under construction in the Inland Empire, up 8.7% from a year earlier, account for nearly half the regional total. The 11.7 million square feet that completed construction here over the past six months were paired with only 9.1 million square feet of net absorption. Concerns about oversupply have arisen.

· High rents, a shortage of new product and competition from the more affordable Inland Empire market contributed to the 4.3 million square feet of negative net absorption suffered in Los Angeles over the last six months.

· There are 8.6 million square feet of projects under construction in Phoenix. Respective completion and net absorption totals for the latest quarter were 1.1 million and 900,000 square feet.

West Vacancy

At 6.2%, the regional vacancy rate remains unchanged since mid-year. The rate was 6.3% a year earlier. The individual markets that produce this appearance of stability are much more dynamic, however. Seven saw their rates decline during the quarter, and huge decreases are recorded for some markets year over year. Five, meanwhile, recorded increases during the quarter; two suffered year-over-year gains. Generally speaking, vacancies tend to be tight in California, where development is difficult (except for the Inland Empire).

· Dramatic recovery continues in the tech-laden markets of greater San Francisco. At 10.4%, San Jose’s still-high rate was down 40 bps for the quarter and was down 370 bps over two years. Vacancies at 8.4% and 4.6% in Oakland and San Francisco held steady, more or less, during the quarter.

· Seattle, Portland and Tucson, tech-heavy markets themselves, also showed recent improvement. Respective quarter-end vacancies were 6.2%, 6.7% and 5.7%.

· Vacancy in the Inland Empire runs at 7.3%, unchanged for the quarter, up 40 bps year over year. Space-cramped Los Angeles and Orange County, at 3.2% and 3.9%, reflect the nation’s lowest rates.

West Rents

The West continues to record the nation’s highest average rent, $8.59 psf, and its highest rent growth rates by far, 2.5% for the quarter, 11.0% over 12 months. These increases nearly double the rate of gain reported for the South, the closest contender. Indeed, double-digit lease rate growth is recorded for eight of the region’s 15 markets for the past year while none suffered a loss. California plays host to most of the big gainers; Tucson and Las Vegas were the exceptions. San Diego and San Francisco, however, suffered small losses during the latest quarter.

· The 12-month increases of 29.0% and 21.0% in San Jose and Tucson led the region. In these metros, current rents are reported at $13.55 psf, highest in the nation, and $8.12 psf, respectively.

· At $12.95 psf, down 0.9% for the quarter though still 10.0% higher since this time last year, San Francisco was second in the U.S. in average rents. Oakland’s 4.5% rent growth in third quarter and 19.2% year-on-year increase produced an average of $9.33 psf.

· Denver, where development has been picking up, posted rent increases of 2.3% to $6.13 psf during third quarter. Phoenix, with its robust development profile, saw a 3.0% increase to $8.23.

West Investment Sales

According to data provided by RCA data, $13.27 billion in industrial property sales were closed in the combined markets of the West during the first three quarters of the year. Excluding the Denver and Phoenix markets, average capitalization rate and selling price for the period were 6.3% and $114 psf. Average caps were higher and sales prices lower in Denver and Phoenix. Well-publicized changes in the lending sector are altering the dynamics of investment in industrial real estate nationwide. However, RCA notes that coastal regions, including the West where institutional buyers are still active, have resisted the upward pressure on cap rates. “Positive momentum” in volume and pricing is indicated for Denver, Seattle and California. Markets with large flex space components–San Francisco and Seattle, for example–benefit from the increase in prices for office properties.

· Los Angeles and Seattle led in investment sales for the first nine months of the year, amassing respective totals of $3.14 billion and $1.45 billion. Prices have been increasing in the former but have been falling in the latter.

· San Diego claims the region’s highest average price at $168 psf. Las Vegas and San Jose follow at $163 and $161 psf. Orange County’s 5.6% cap rate is the lowest in the region.

· Recent significant sales include Arden Realty Inc.’s $88.0 million ($214 psf) purchase from Willows Redmond LLC of the 411,398 square foot Willows Commerce Park in Redmond WA outside Seattle.