Industrial vacancy rates edge up

The industrial vacancy rate edged up to 9.9% in the first quarter from 9.7% at the end of 2005, but remains below the 10.7% rate achieved in the first quarter of last year. Construction spending is still increasing for both factories and warehouses, but construction starts for both building types declined sharply so far this year, suggesting that spending on job sites will peak very quickly for warehouses and factories.

Factory construction spending surged nearly 8% from March to April, which is 28.4% higher than the same period last year. Most of the increase was for durable goods factories that are struggling to keep up with orders from capital goods and foreign customers. Both the export and investment sectors are expanding at about three times the rate of the domestic consumer economy. Warehouse construction spending has been steady in 2006 and is currently 10.6% higher than the same period last year, which represents a slim gain for warehousing given that the warehouse cost index prepared by R.S. Means for the Producer Price Index measures costs up 7.8% over the same period last year.

Demand for warehouse space has not kept pace with the economy's growth. Warehouse space needs depend primarily on consumer purchases of non-durable goods, which have trailed the overall economic growth rate. Also, many large consumer goods importers have learned to organize their containers so that they can truck or piggyback containers directly from ships to final destinations, which eliminates the need for warehousing near the port. Year-to-date through May, warehouse starts are off 34% from the same period last year with factory starts similarly down 28%. Factory starts may resume expanding under pressure from the 82% factory capacity utilization rate, a little above the threshold for the usual end-of-cycle surge in factory capacity investments.

U.S. cities with the highest and lowest industrial vacancy rates
(2006 Q1 vacancy rate %)