Housing collapse gets the blame for industrial market’s woes

By Brian Wargo (contact), In Business reporter

Fri, May 1, 2009 (2 a.m.)

The effect of the housing market collapse extends well beyond the residential sector, as evidenced by the industrial building market’s foundering in the fallout.

Vacancy rates have reached their highest level since the recession in 2002 when the rates averaged between 10 percent and 11 percent.

Restrepo Consulting puts the vacancy rate at 12 percent, and Applied Analysis says it’s 10.5 percent. The vacancy rate was 7.6 percent at the end of March 2008 and closed 2008 at 9 percent, according to Applied Analysis.

Bob Bach, Grubb & Ellis’ chief economist, says Las Vegas was one of five markets with the largest industrial vacancy increases in the past year. The others were Southern California; Orlando, Fla.; Phoenix; and Reno, which had the highest vacancy rate in the nation at 15.2 percent.

It is not surprising that the markets hit hardest by the housing slump are the ones most affected, Bach says.

“The obvious link is that home sales generate retail sales, which create demand for industrial space from retailers, wholesalers and related logistics companies,” Bach says. “The not-so-obvious link is that the construction industry, which has been devastated by the housing collapse, is an occupier of industrial space.”

Bach says he doesn’t expect the industrial market to hit bottom until the second half of 2010, and it will start a sluggish recovery in 2011. The average U.S. vacancy rate of 9.5 percent in the first quarter, however, won’t top the 13.7 percent peak as a result of the recession in the early 1990s, he says.

Applied Analysis reports tenants vacated 1.4 million square feet of space more than they moved into during the first quarter. There were 10.8 million square feet of empty space at the end of March.

“The broader economic climate is impacting the local industrial sector,” Applied Analysis Principal Brian Gordon says. “If you are a distributor, you are holding less inventory and at the same time looking to cut costs and one of those areas is space requirements. As leases expire, they are migrating to less space or companies forced into bankruptcy, like Circuit City, are reducing their overall space needs for warehouse distribution space. Smaller companies with ties to the resort and construction industry are implementing cost saving measures and part of that includes space needs.”

The increased availability of space is costing developers who have lowered rents to levels not seen since the third quarter of 2006, Applied Analysis reports. The average rent was 74 cents per square foot.

Jake Joyce, Applied Analysis project manager, says rents should slide even more, falling by double digits.

The price breakdown with average rents are 66 cents per square foot for distribution, 78 cents per square foot for manufacturing and 96 cents per square foot for flex space.

Housing market report

Dennis Smith, president of Home Builders Research, says the first quarter will go down in the record books. The question is, he says, is for what will that be.

Will it be viewed as either the worst ever for the new-home market or the beginning of a long-awaited recovery? Smith’s answer: both.

The 1,132 new-home sales in the first quarter are down 61 percent from the first quarter of 2008.

But Smith says the good news is that the first quarter of 2009 will be considered the bottom and sales will gradually rise.

“Low interest rates, continued slumping prices and first-time buyer tax credits will have a positive effect on sales,” Smith says. “It’s not enough to declare a turnaround, but sufficient to exhibit proof the new-home segment has stopped declining.”

The median price of new-home closings was $220,000 in March, $100 more than in February, Smith says. That is down $58,630 in the past year.

When omitting condominiums from the new-home sales, the price for traditional homes was $228,030 in March, a decrease of $31,910 or 12 percent over the past year, Smith says.

It’s too early to suggest this is the bottom of the new-home price declines, but if that continues next month, that might be the case, he says.

“It sure feels like it is very close, at least for new homes,” Smith says. “Resales will take a bit longer.”

The 551 building permits issued in the first quarter were down 51 percent from 2008, but Smith says he expects the numbers to pick up by the middle of summer.

Medical office space

The medical office market vacancy rate grew in the first quarter, but remains below the office vacancy rate.

CB Richard Ellis reports a vacancy rate of 16.5 percent in the first quarter, an increase from 15.4 percent at the end of 2008. Despite the increase, medical offices have a lower vacancy rate than the overall office market that stands at 18.8 percent, according to the firm.

The southwest valley had the highest vacancy rate at 36.7 percent. North Las Vegas had the lowest vacancy rate at 1.1 percent

The average lease rates across the valley were unchanged at $2.36 per square foot. The northwest valley had the highest at $2.60 per square foot.

But landlords are luring tenants with free rent and higher tenant improvement allowances. There was 18,000 square feet of space vacated in the first quarter than occupied.

Brian Wargo covers real estate and development for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at wargo@lasvegassun.com.