Industrial markets experience best year ever.

The United States' major industrial real estate markets experienced another banner year in 1999, as the U.S. economy continued on its healthy pace, according to the international real estate services firm Cushman & Wakefield, Inc.

"The greatest challenge for the U.S. industrial markets will be sustaining a healthy economy with the possibility of interest rate hikes looming," said Donald P. Eisen, executive managing director of Cushman & Wakefield.

1999 Performance

Despite this uncertainty, orders for most durable manufactured goods continued to rise in the final quarter of 1999, according to the U.S. Department of Commerce. This activity translated into intense demand for warehouse/distribution space in most major industrial real estate markets. In fact, approximately 351 million square feet of industrial space was leased across the U.S., making 1999 the most active year on record.

Available industrial opportunities across the country were at all-time lows as a result. The estimated overall vacancy rate stood at 6 percent nationally, which represented nearly a full percentage point decline from one year ago. Warehouse/distribution space continued to account for the highest concentration of the 403 million square feet of industrial space available at 62 percent.

The most active industrial markets with regard to transactions in 1999 were Los Angeles, Chicago and Northern/Central New Jersey. However, the markets demonstrating the greatest one-year improvement, according to Cushman & Wakefield research statistics, were Boston, San Jose, Central New Jersey and Ontario (California).

Construction

National industrial construction completions over the past five years were as follows: 1995 - 45,550,766 square feet; 1996 - 74,293,028 square feet; 1997 - 110,305,621 square feet; 1998 - 119,197,419 square and 1999 131,529,004 square feet.

Since 1995, construction levels have increased by nearly 200 percent. Last year alone, 132 million square feet were constructed. Of this new space, 36.1 percent was vacant. Chicago and Ontario (CA) were the two most active construction markets, delivering 15.5 million square feet and 13.9 million square feet respectively.

"Most of the space currently under construction possesses higher ceiling heights, state-of-the-art building and racking systems, and a more efficient loading terminals to accommodate longer trucks," said Cushman & Wakefield Senior Manager of Industrial Services Donald N. Noland. "This allows companies to more efficiently manage the storage and transportation of material, inside the warehouse."

The Players - Users and Developers

Driving this bullish market have been high technology and telecommunications companies, third party logistics firms, bio-tech companies and direct mail distribution entities. The most notable of these firms has been e-commerce companies which are responding to customers' evolving needs of speedy delivery of products purchased over their web sites. While many of these firms have not yet made a profit, they have capital readily available as a result of healthy stock market returns and successful initial public offerings.

Many industrial developers feel that future demand for industrial space from e-commerce firms will evolve through several market dynamics, including: Internet startup companies; on-line business-to-business marketing; and the expansion of existing retailers into Internet-based sales media.

"Ballooning from minimal sales in the mid-1990's to over one trillion dollars in sales by 2002, e-commerce will be the industry sector to watch in the 21st Century, and industrial real estate will undoubtedly benefit from it," said Noland.

Expectations suggest that demand for industrial real estate in the U.S. by these firms will be realized in the immediate future, as they construct build-to-suits surrounding major transportation hubs in close proximity to high volume freight handlers such as Federal Express and UPS.

Real Estate Investment Trusts (REITs) have already begun to respond. For example, First Industrial Realty Trust, based in Chicago, announced plans to reshuffle its portfolio to take advantage of the demand for industrial space from these firms. Additionally, AMB Property Corporation, based in San Francisco, has made similar announcements. Other REITs, as well as some private developers, continue to evaluate their holdings in response to these users.

According to the New York Society of Security Analysts, although REIT stocks fell nearly 11 percent during the first 11 months of 1999, investors continued to commit billions of dollars through stock investment in the REIT industry. This commitment, as well as new legislation that will allow REITs to own a taxable REIT subsidiary in 2001, will encourage these property owners to increase their capital investments in real estate. With only an estimated nine percent of commercial real estate owned by REITs, there is a tremendous opportunity for greater investment.

Industrial Outlook for 2000

Noland forecasts the following: Overall vacancy rates will stabilize; new construction levels, especially speculative development, will decline; obsolete industrial properties will continue to be converted to alternative uses, including residential and retail; rents and real estate values will rise; REIT stock prices will regain the value lost in 1999, or 11 percent; e-commerce business will play a larger role in warehouse construction; the U.S. economy will witness a minor slowdown due to rising interest rates as early as April 2000; and unemployment levels will stabilize around four percent.