Clouds over industrial sector won't break until '03

May 01, 2002 |

Industrial construction spending for manufacturing plants and warehouses has plunged in the U.S. during the last year. That's no surprise, given that manufacturing sector employment has declined in every month over the past two years, and industrial production declined for 15 consecutive months through the end of 2001.

Medium- and long-term demand for new industrial space is closely correlated with industrial output, export growth, and capacity utilization rates — all factors that have weakened dramatically during the past 18 months.

Between February 2001 and February 2002, total manufacturing capacity in the U.S. increased by a scant 1.1 percent, after rising at a 4.9 percent annualized rate over the previous year.

Even this marginal expansion was far too much space for the industrial market to absorb, because over the same period, manufacturing industrial production plunged by 4.1 percent. Consequently, the total manufacturing capacity utilization rate dipped to just 73.2 percent during February 2002 — its lowest level since March 1983 — and the nation's industrial vacancy rate rose steadily throughout the entirety of 2001.

Total 2001 spending on industrial buildings nationwide was $31.1 billion, only 3.2 percent lower than the $32.1 billion the year before. But this came on the heels of declines during both 1999 ($32.6 billion) and 2000. Things were much the same entering this year, with January's seasonally adjusted annualized spending rate of $23.7 billion being 34 percent lower than the previous year. So trends in the industrial sector were continuing to deteriorate entering 2002 despite tentative signs of the commercial market sector bottoming out.

Growth to return next year

Industrial construction spending this year is expected to fall at an even steeper rate than in 2000-2001, despite some encouraging recent signs that the market may finally be on the mend. The good news is that the incipient resurgence in related production and investment should position the industrial market for strong growth in 2003.

Market analysts at the commercial brokerage firm Grubb & Ellis, Northbrook, Ill., note that although conditions deteriorated still further during 2001, the industrial market has actually fared better than the office market over the past three to four quarters. And the company expects the industrial vacancy rate nationwide, which their survey pegged at 8.3 percent during the final quarter of last year, will peak at about 9 percent by next summer. That level is well below the 13.7 percent peak reached during the last recession.

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