Industrial vacancy rate declines even as construction soars

July 01, 2005 |

The vacancy rate for manufacturing facilities and warehouses declined to 10.7% in the first quarter of 2005 from 11% late last year and 11.3% a year earlier, according to a quarterly survey by CB Richard Ellis.

The lowest vacancy rates, by a wide margin, are in the New York and Los Angeles areas. During the last few years, distribution centers and related light manufacturing for both domestic and foreign products have consolidated in the New York, Los Angeles, and Chicago regions. Because ports and other freight terminals in New York and Los Angeles are now overcrowded, thus adding significant expense to distribution costs, metro area space demand growth is likely to slow next year and beyond. However, very low vacancy rates will keep new projects coming for several more years.

After three years of decline, national warehouse construction spending is up 13% year to date through April compared to the same period last year and is forecast to increase 13% this year and more than 10% next year. Warehouse space needs early in the economic expansion were met by the drop in the inventory/sales ratio from 1.45 months of inventory in 2002 to 1.31 a year ago. This is currently near the best practices minimum, so further rapid declines are not expected. It's clear that more warehouse space needs to be built.

The factory market is even stronger. Construction spending for manufacturing facilities has increased 30% year to date from 2004 and will expand 32% this year and 15% more in 2006. This is the usual exaggerated response to a reduction in surplus production capacity in an expanding economy.

Factory capacity utilization increased from 72.4% to 77.4% in the last two years. A further rise to near 80% is expected later this year. This will yield double-digit growth in factory construction for several more years.

Overlay Init