Sales Market Recovery Lags

"Like other property types, industrial sales transaction volume, measured as a percentage of the total market, remains far below historical averages, and well below the trough of the recession 10 years ago. Most markets are plagued by poor liquidity, though a few, including Raleigh-Durham, Richmond, VA, Washington, D.C., Inland Empire, Tampa/St. Petersburg and Charlotte, are seeing higher square footage sold as a percentage of their total market size. Buyers and sellers remain at odds on selling versus asking prices, though the number of properties withdrawn from the sales market by discouraged sellers is starting to level off.

The CoStar Repeat Sales Index, which measures the price differential between properties that have sold more than once, shows that industrial prices remain in decline, though larger investment-grade properties are seeing some price appreciation in the bifurcated market. Those investors returning to the market prefer the safety of those well-leased higher-end properties.

The largest industrial sales in the third quarter were portfolios, with three of the top four acquired by REITs, including the purchase of seven data center properties in Arizona, California and Virginia by Digital Realty Trust from Rockwood Capital for $725 million. Portfolios made up 40.6% of total sales volume in the third quarter.

While bullish on the recovery long term, industrial CRE brokerage executives sampled by CoStar are cautious about what they see as uncertain signals from the economy.

"The summer may have proved to be an inflection point in the industrial leasing market, but we are cautious about the mixed signals we are seeing in important leading indicators, and what they are telling us about the overall direction of the U.S. economy right now," said Craig S Meyer, Jones Lang LaSalle managing director and head of industrial real estate for the Americas.

While there's still significant activity in the big-box sector, manufacturing has lost some of its momentum as inventories have stopped growing as fast, Meyer said. Consumer confidence is being constantly tested and supply chains are expected to run leaner going forward. While imports and cargo volumes through gateway seaport and airport markets have improved, it's uncertain whether these higher volumes are sustainable, Meyer said.

"We are expecting rents to continue to decline through 2011," he said. "The worst of the declines may be over, and while there are pockets of organic growth now beginning to develop, demand has not firmed significantly enough throughout the entire industrial market to envision an overall or sustained uptick yet."

"It will be a long process toward recovery, but the worst appears to be behind us," said David Bercu, principal in the Chicago office of Colliers International.

"The first step was landlord capitulation on rental and sale prices, which started its rebound second-quarter 2010. Owners have acknowledged that prices have dropped approximately 30% since the peak of 2007 and met the market," Bercu said.

Recent economic data indicates a slowdown in manufacturing and a reduction in inventories, however, which could have a direct impact on industrial real estate, Bercu said."