Industrial vacancy rates increase in 2003 driving down rental rates for most property categories.

Average rental rates for most industrial property categories declined in 2003 as U.S. industrial vacancy rates continued to increase, according to the NAI 2004 Global Market Report (formerly the NAI Real Estate Planning Guide), an annual review of real estate values, trends and opportunities in 196 property markets worldwide.

NAI partnered with Linneman Associates to produce this year's report, with noted real estate analyst Dr. Peter Linneman providing his expertise and insight to the global and regional overviews and forecasts.

Average rental rates for warehouse space decreased 2.20% from year-end 2002 to 2003, from $4.10 to $4.01 per square foot, as the average vacancy rate for warehouse space climbed from 10.20% to 10.71%. Since 2000, average rental rates have declined 8.86%, from $4.40 per square foot. The average warehouse space vacancy rate was 8.02% in the year 2000.

For manufacturing space, average rental rates decreased 3.88% from 2002 to 2003, from $4.64 to $4.46 per square foot, as the average vacancy rate for manufacturing space increased from 9.21% to 9.85%. Since 2000, average rental rates have declined 11.68%, from $5.05 per square foot. The average manufacturing space vacancy rate was 7.13% in the year 2000.

Only R&D/flex space showed a year-over-year improvement in average rental rates, which increased from $9.36 to $9.44 per square foot, despite average vacancies for this property category increasing 11.19%, from 11.97% to 13.31%. Still, average rental rates have fallen markedly since the year 2000, when they were $12.97 per square foot.

"Almost every real estate market remains challenged, particularly in "the commodity product sectors and in the bubble economy markets, due to abundant supply and limited demand," the NAI report says.

However, "the U.S. real estate markets are poised for growth, as new construction has been largely stopped and demand is starting to pick up, fueled by economic growth. While demand for real estate will lag the [national] economic recovery, positive absorption will cause vacancy rates to slowly fall over the next five years. Within 18 months, rental rates will stabilize and begin to creep upward.

"As the economic picture brightens and corporate profits improve, leasing will improve. However, as interest rates rise (starting in the latter half of 2004), sale transactions will likely fall."

Notably, the NAI Global Market Report addresses the issue of outsourcing jobs abroad: "The loss of manufacturing and call center jobs could certainly negatively affect the industrial sector ... in the short term. But in the medium to long term, these availabilities will be filled by other companies, industries or government agencies that may not even exist today."

Top 10 Highest-Price U.S. Industrial/ Warehouse Markets--Average Rental Rates

Marin County, CA $13.50 per square foot; San Diego County, CA $8.64; Santa Cruz County, CA $8.40; San Francisco County, CA $8.28; Las Vegas, NV $8.28; San Mateo County, CA $8.16; Westchester, NY $8.00; Washington, DC $6.90; Ventura County, CA $6.60; Orange County, CA $6.24. Top 10 Highest-Price U.S. Industrial/ Manufacturing Markets--Average Rental Rates

Marin County, CA $13.50 per square foot; San Mateo County, CA $9.96; San Diego County, CA $8.88; Santa Cruz County, CA $8.88; Las Vegas, NV $8.64; Westchester, NY $8.00; Monterrey County, CA $7.80; Santa Clara County, CA $7.68; Orange County, CA $7.44; Manchester, NH $7.25;

Find more information about the NAI 2004 report at www.naidirect.com, under "Market Information."