Grubb &Ellis report cites strong finish at end of 2010 in logistics real estate market

An improving economy led by various drivers for logistics services laid down the foundation for strong demand for logistics space during the second half of 2010, according to a new report from commercial real estate firm Grubb & Ellis, entitled “Logistics Market Trends United States Second Half 2010.” 

These drivers included strong industrial production growth and retail sales, improving surface transportation volumes, and higher levels of intermodal shipments and containerized cargo arriving at U.S. ports, the report stated.

Nearly 20 million square feet was absorbed between July and December 2010, according to Grubb & Ellis, with demand in the fourth quarter accounting for 15.9 million square feet, which the firm said would be a very healthy number even during peak market activity between 2005 and 2007. Two key takeaways of this statistic are that the recovery is widespread and positive demand is returning to large blocks of space, the report noted.

“There are some very good signs and trends for growth going on,” said Rene Circ, Vice President, National Director of Research, Industrial, at Grubb & Ellis. “The recession has been over for about 20 months, but unemployment is still clouding people’s views. And in the last one and a half to two years we are seeing some improvements, but the decline we saw before that would have been twice as much if renters gave up all the space they did not need at that time.”

While the economy in 2010 did not fully meet its potential with a GDP of 2.8 percent, 2011 prospects look better with current projections at 3.5 percent, despite the current uncertainty in the Middle East.

Overall market conditions for logistics real estate space in the second half of 2010 were much better than the first half, with 19 of the 28 logistics markets tracked by Grubb & Ellis recording positive demand. And the report pointed out that there were 31 buildings with positive net absorption greater than 500,000 square-feet during 2010, with the firm stating that the return of absorption in large blocks of space suggesting increased confidence among occupiers.

Another interesting point raised in the report is that national logistics space was not hit as hard by the downturn of demand as the overall industrial sector. It said that the cumulative net absorption dating to the first quarter of 2009—the first quarter with negative demand—turned positive in the fourth quarter of 2010, indicating that total occupied space has returned to pre-recession levels. What’s more, Grubb & Ellis noted that the current elevated vacancy levels are a result of new supply delivered prior to the recession as opposed to negative demand.

Another positive indicator, according to the report, is that the national vacancy rate, which Grubb & Ellis considers the best measure of the market, continued to decline in the second half of 2010, with a 12.8 percent level at the end of the year. This represents a 50 basis-point improvement over the mid-year reading and a one point improvement compared to the end of 2009.

Circ said that as market conditions improved, so, too, did the ability of companies to gain more visibility into their business, although he said it can vary by company size.

“The larger companies…are already operating as if the economy was humming, and the smaller companies still do not know 100 percent where they stand and you can see that in the activity,” said Circ. “The best thing happening in the market—although it is not ideal for owners—is that rents are still very cheap to a point where new construction is really not justifiable, which impacts build-to-suit development. Anything speculative is pretty much non-existent.”

And while the market has gone through a largely difficult period in recent years, Circ said all the economic drivers are intact to help spur recovery, especially imports, which go from ports to stores, with a distribution facility in between, and drives demand for logistics space.

Grubb & Ellis also stated in the report that logistics real estate-related transactions in 2011 checked in at more than $5.5 billion, representing a 133 percent annual improvement over 2009. And it said volume would have been higher if there “had been enough quality product on the market for sale,” given how by the end of 2010 the number of offers for logistics properties in primary locations was near the same level that occurred at the peak of the market.

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