Industrial vacancy rates dip, even as construction of new factories and warehouse facilities soars

The factory and warehouse vacancy rate dropped 0.1% to 10.1% in the third quarter of 2005, continuing the industrial sector's two-year space-filling spree, during which vacancy rates dipped 2% annually.

The latest quarterly decline occurred despite a surge in new space stemming from an influx of project starts in late 2004.

Construction spending for manufacturing and warehouse facilities has remained steady during the last year, which will keep the new facilities pipeline full for the better part of 2006. Vacancy rates will continue to decline slowly because new space demand in the fourth year of economic expansion exceeds the current high level of space completions.

The forecast for construction spending looks bleak, however. The number of new project starts fell sharply in the last half of 2005, and spending is expected to slow over the next two years. Spending growth is expected to slip to about 10% in 2006 and 2007, after 21% growth in 2005.

The electronics and transportation industries both had an 80% increase in construction spending from early 2004 to late 2005 as they recovered from the last recession and boosted export sales. Similarly, the small fabricated metal and nonmetallic mineral (i.e., gypsum, clay, and aggregates) industries both boosted spending for new facilities by 40–50%. The current high level of facility investment will be maintained by these industries well in 2006, but there is little prospect for further significant increase.

Facility expansion has been markedly weaker in the process industries. Chemical manufacturers raised facility construction spending about 20% late in 2005. However, this was temporary added spending for hurricane repairs, not capacity expansion.

U.S. cities with the highest and lowest industrial vacancy rates
(2005 Q3 vacancy rate %)