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It’s a New Year!

Mark Duclos

We are four weeks into 2010 and you have probably been asked “How was 2009″ and “What does 2010 look like” a whole bunch of times already. I know I have. And while I have a pretty good answer on the 2009 question (usually starts with…”wasn’t as bad as I thought it was going to be”), I am still struggling with the 2010 question. 

Four to six weeks ago I was pretty convinced that the industrial real estate market (the “user/tenant/buyer” side of it) was going to experience a significant rebound this year. I am beginning to think that I should drop the word “significant” from that statement. I do believe that there is more clarity out there than this time in 2009 (of course that isn’t saying much) and that will mean an improved 2010. However, while 2009 was spent saving and stablizing the patient, it is becoming clearer that the patient will recover this year but that the stabilization period might have a little bit more time left.

While NEW transaction volume in 2010 should be significantly higher than 2009 (again, this isn’t saying much), landlords will continue to struggle trying to lease their buildings and maintaining acceptable net effective lease rates. This will hold especially true in the larger industrial market where the availability of large industrial buildings grew significantly in the last 24 months. While commercial real estate brokerage companies are reporting vacancy rates in the 14-15% range, the actual percentage of vacant industrial buildings in the region is significantly higher. Why? Because vacancy rates don’t include corporate owned/user real estate. And the increase in the availability of large buildings in the last 24 months did not come from overbuilding (i.e. developers), but instead from the corporate real estate world. Bottom line? While there will be more requirements in the marketplace in 2010 there are many, many more buildings for those out there looking to look at!  That will cause continued downward pressure on rents for some time to come.

On the sale side…while the credit crunch appears to be loosening, buyers still need more cash to get credit! Yes, equity is the name of the game and what use to be a 75% loan to value has become (over the last 12-18 months) a 60-65% LTV proposition. From the user side…this means that companies need to use valuable cash (cash they need for operating capital) to fund their real estate. Not something that a lot of companies have the luxury of doing. And while there is a government push to FORCE banks to free up additional credit…I’m not quite sure that this will mean much. Yes, there’s more debt out there for buyers to access, but the question is…at what terms!?! In spite of this, I believe the small to medium sized building market will continue to be reasonably active. In fact, I believe that this market might in fact show value appreciation in 2010. That said, the large building sale market will remain challenged. Yes, there will be transactions, however there will be continued pressure on pricing due to the availability of product.

The good news? There appears to be less corporate product coming to the market. Less plant closings. Less downsizing (although, as I write this I realize that EB just laid off 430 workers). There also appears to be more companies out looking again with “real” requirements (versus looking to leverage their landlords on renewals). Growth appears to be in the MINDS of companies out there (albeit slow and gradual)…now we just need to take that from the MIND to ACTION!  The economy grew at a 5.7% clip last quarter (even though much of that came from depleted inventories)…seems to me that this is a real look into the second half of 2010.

Where will the ongoing pressure come from?…

Government! Has anyone heard SO MUCH talk about state and federal government and its effect on business than they have the last 12 months? Yes, that’s troubling. It is potentially polarizing. Government needs to get its act together in order to fuel REAL business growth.

Excess plant capacity. Just how much excess plant capacity is there (in terms of floor space AND people) before companies need more space? ?

Outsourcing/Contract Workers/Mobile Work Force! Might be a short term response to the previously mentioned government worries, but I don’t think so. The SAM’s layoff (and outsourcing to a third party) is just a continuation of a growing trend. Less workers, less space. 3PL’s are (and will continue to be) a significant player in today’s landscape. The growing mobile workforce will also continue to play havoc on corporate real estate’s space needs.

Yes, It’s a New Year! The crystal ball continues to work overtime for everyone! And while the ball is much less fuzzy this year (i.e. more “CLARITY”), I’m not sure that it is providing us with the answers that we are all want to hear. 

Keep smiling!


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