Industrial Property Outlook: Vacancy Rate Across Top 30 Markets Falls to 8% in First Half of Year

Denver-based ProLogis, a global provider of distribution facilities and services, recently released two semi-annual research reports on the state of the U.S. industrial property market. The first, the company's U.S. Property Market Review, indicates that the average industrial vacancy rate across the country's top 30 markets fell to 8% in the second quarter of 2006, compared to 8.8% the year before. Asking rents increased 8% in the 12 months ended June 30.

The second study, U.S. Construction Pipeline Report, says that industrial starts in the United States are projected to reach 130-140 million sq. ft. in 2006, or about 2.6% of existing inventory. At the same time, construction costs have jumped sharply and may increase as much as 15% by the end of the year.

"Property owners are now in the driver's seat, with enough leverage to begin pushing rents higher," said Leonard Sahling, ProLogis first vice president of research. "Our projections call for the national vacancy rate to recede below 8 percent by year end, paving the way for sustained, broad-based rent increases."

More findings from the reports:

• Net absorption totaled 67 million square feet during the first six months of the year, which translates to a 2.8% annual growth rate in total occupied space;
• The Los Angeles Basin remains the nation's tightest distribution market, with an overall vacancy rate of about 3.5%. Other tight markets are Chicago, Northern New Jersey and Eastern Pennsylvania;
• Speculative building accounted for 72% of total starts in the first half of the year, compared with 77% in the second half of 2005;
• Construction outlays are rising as a result of broad-based run-ups in prices for steel, concrete, asphalt and copper. In aggregate, they will add as much as $3 per square foot to the shell cost of a typical distribution facility over the course of the year.