WORLD PROPERTY CHANNEL ®

(SANTA ANA, CA) -- Logistics properties, the single commercial real estate category that has held up well during the country's two-year financial crisis, now faces a shrinking inventory.

"The construction pipeline for logistics space is emptying rapidly," reports Bob Bach, senior vice president and chief economist at Grubb & Ellis Co.  But the outlook for this market is not entirely gloomy, he adds.

"Although market conditions are expected to soften over the next few quarters, when the economy slows, the demand for logistics space still tends to hold up well," Bach says.

The reason:  "Manufacturers need to store excess inventories while their sales slow, in turn boosting demand for warehouse space."

He makes his observations in the first Logistics Market Trends Report prepared by Grubb & Ellis Co. The report covers fourth quarter 2008.

The report notes that while vacancy rates for logistics properties have risen, asking rental rates have decreased little.  At year-end 2008, the national average asking rental rate was $4.16 per square foot, triple net.  That was 3 percent less than the cyclical peak of $4.29 in fourth quarter 2007.

Today, gaining 260 basis points, the vacancy rate is at 11.7 percent.


In 2008, 98 million square feet of logistics space was delivered, nearly four times the 26 million square feet absorbed.

"With absorption badly trailing completions, developers cut back, starting only 57 million square feet of logistics space last year, including just 17 million square feet in the second half," Bach says. 

As a result, the amount of logistics space under construction ended the year at 34 million square feet, off 39 percent from the cyclical peak of 88 million square feet recorded in the second quarter of 2007.
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Still, Bach says, "On a long-term basis, businesses look at logistics space as a productivity enhancer, an integral part of their supply chain strategies."
 
Southern California, one of the country's largest consumer markets, is 'a critical link in the supply chain," Bach notes.  The area's ports handle more than 40 percent of all U.S. container imports, and 14 million consumers can be reached within a two-hour truck trip from the twin ports of Los Angeles and Long Beach. 
 
The report also identifies the nation's top 10 logistics markets: Chicago; Inland Empire, Calif.; Atlanta; Dallas/Fort Worth; Los Angeles; north and central New Jersey; east and central Pennsylvania; Houston; Columbus, OH; and Indianapolis, IN.

Bach backs up his projection on near-future logistics space with current economic barometers.

He notes,  "The recession that began in December 2007 took a turn for the worse in September 2008 when the credit crisis deepened. Personal consumption expenditures, which account for 70 percent of gross domestic product, increased 0.3 percent in 2008, a17-year low."

This included annualized declines in the third and fourth quarters of -3.8 percent and -3.5 percent, "the steepest quarterly declines in 28 years," the economist says.

Seasonally adjusted retail sales fell 2.7 percent in December, the sharpest one-month drop in 22 years, while the Conference Board Consumer Confidence Index plunged to its lowest level in the 40-year history of the survey.

As a result, Bach says, "Global growth has contracted sharply taking export and import volumes with it, while business capital spending has dried up. The labor market has shed 3.6 million payroll jobs since the start of the recession, a jolting 2.6-percent drop. These and other indicators point to a further decline in demand for logistics space."

However, he says, "The relentless quest for cost-saving efficiencies by businesses should cushion the fall in demand for logistics space even as the economy struggles in 2009."

But he cautions,  "Even Class A logistics space could see several quarters of negative net absorption, which would be the first time this decade."

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