Manufacturing vacancies decline, construction expected to surge

The vacancy rate for manufacturing facilities begins the year at 11%, nearly a full percentage point lower than a year earlier but still about 2% above the long-term average vacancy rate. New York, Los Angeles, Denver, and Salt Lake City have below-average availability, mostly due to their recently increased importance as distribution centers, especially for imported goods. Midwestern manufacturing centers have 10–12% availability. This is a generous supply for manufacturers or distributors with modest space needs but not generous enough to significantly depress rents. Vacancy rates are higher in high-tech centers, ranging from 13% in California to nearly 20% elsewhere. While electronics will continue to expand rapidly, space needs have been reduced by smaller parts and products, offshore assembly, and just-in-time inventory management. However, the incipient venture capital revival will generate demand for space this year and next.

Overall manufacturing capacity utilization is now 77–78%, just below the threshold where a strong surge in factory construction begins. So far, factory capacity additions have expanded from 1% to 2% of the existing stock over the past year and are expected to reach near 3% of stock by the end of 2005. But production is growing faster, so the overall capacity utilization rate will rise to about 82% by December and slightly higher in 2006. As a result, manufacturing construction spending is forecast to increase over 20% in both 2005 and 2006. This surge will get construction activity only halfway back to the exaggerated peak reached in 1998.