Monday, May 5, 2008

Weaker Industrial Demand, More Of The Same

This is from Torto-Wheaton Research, who is uniquely positioned to monitor the real estate situation from 30,000 feet. Bill Wheaton is a real estate professor at MIT and one of the few economists who has done groundbreaking research in Real Estate, he literally wrote the book on real estate economics.

That being said, what this chart suggests is that while Los Angeles and Orange County have reported large negative net absorption numbers, they are not as bad as say, Detroit.

Few things are worse than Detroit, very few precious things in this world, but it says a lot about what is actually going on here. Negative net absorption means that more people are moving out of their spaces than new people moving in. Negative net absorption almost always leads to a rising vacancy rate; occupied building demolitions with a 0% vacancy rate is the one exception I can think of, since occupied SF will change but the vacancy rate will not.

In any case, all these markets on this chart had increases in the vacancy rate, some more than others. The vacancy rates in OC and LA changed less than a percentage point over the year, but due to the size of the industrial market, has led to large negative net absorption.

Los Angeles and Orange County are better positioned than most of the regions on this list for two reasons; the vacancy rate in LA and OC are dangerously low and in comparison with many of these other regions there is little construction that can take place so overbuilding did not occur.

One culprit is noticeably missing from this chart: yours truly, the Inland Empire.
TWR had positive net absorption for the Inland Empire (+4.7 Million SF), and even I reported some fairly optimistic numbers (+2.2 Million SF).

For the Inland Empire things can go wrong pretty quickly but I don’t think we will end up on this list this year; there are plenty of large deals that were signed in the last 5 years that should carry us through this down-turn, provided the worst is already over. If consumer spending doesn’t increase and if building construction continues at its breakneck pace, (which it hasn’t, construction has been very responsive at least from what I have been seeing so far), then we might see some negative net absorption by the end of the year.

But at least we will be better shape than LA, OC or *gasp* Detroit.

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