Report: nation's tight industrial market should loosen up.

The second quarter marks the ninth consecutive quarter that the U.S. industrial market has tightened, but the streak could be poised to end, according to the latest report from Grubb & Ellis.

Demand for space, as measured by absorption, remains very strong, with spot shortages of Space cropping up in an increasing number of markets, particularly supply-constrained areas like Southern California, South Florida, Las Vegas and Long Island.

But the amount of space under construction also has risen for nine consecutive quarters with no decline in sight, and appears ready to set a new record as early as next quarter.

The U.S. economy has slowed recently due to high oil prices, rising interest rates and the decelerating housing market. But this slowing may be just what the economy needs--a return to a sustainable rate of growth that will tamp down inflation.

Overall, Grubb & Ellis predicts that tenant and owner-user demand for industrial space should stay roughly in equilibrium over the next few quarters and, although fluctuations in absorption, construction and vacancy rates should be expected, those will average out to a sustainable rate of expansion.

In its U.S. Industrial Market First Look: 2006-Q2, Grubb & Ellis highlights the following:

* The industrial vacancy rate inched lower by 10 basis points (one-tenth of a percentage point) to end the second quarter at 7.9 percent. Vacancy is at its lowest level since the third quarter of 2001. It was the third consecutive quarter that vacancy declined by 10 basis points, suggesting that equilibrium is at hand. The market is moving from the recovery phase of the real estate cycle into the expansion phase, featuring strong absorption, strong construction and rental rates that are rising close to the rate of inflation.

* Twelve of the 65 U.S. markets and six of the seven Canadian markets tracked have vacancy rates at 5 percent or below. Calgary, Alberta, has North America's lowest industrial vacancy rate at 1.4 percent, followed closely by Los Angeles at 1.8 percent. Commodities and the oil industry are driving demand in Calgary, while global trade and logistics are driving demand in Los Angeles. Northeast Pennsylvania, a small market with a relatively large amount of speculative construction, has a vacancy rate of 17.8 percent, the highest in North America.

* Second quarter absorption of 45.5 million square feet in the U.S. easily bested space completions totaling 27.8 million square feet.

* The adjacent Los Angeles and Riverside-San Bernardino markets led all other U.S. markets in second-quarter absorption. Chicago, Dallas-Fort Worth and Fresno rounded out the top five. A few markets saw modest negative net absorption, including Philadelphia, Detroit and Kansas City.

* Space under construction rose for a 10th consecutive quarter to 117.8 million square feet and is about to pass the all-time peak of 121.8 million square feet recorded in the fourth quarter of 2000.

* With 21.9 million square feet in the pipeline at mid-year, Riverside-San Bernardino accounts for 19 percent of all space under construction in the U.S. Atlanta is a distant second with 11.1 million square feet underway.

* The average asking rental rate for warehouse-distribution space, $4.53 per square foot per year triple net, is up 2.6 percent over the past four quarters. This average masks some sharp increases in a few markets including Las Vegas (up a third), Los Angeles, Orange County, Miami, Austin, Fresno and ... Des Moines, where steady demand and little new construction have set the stage for recovery from a slow patch created by corporate downsizings.

* Rental rates are flat or even slightly negative in a number of markets, including Northern and Central New Jersey, Chicago, Pittsburgh and Cleveland. Even in these markets, however, rental rates for new space have risen due to the sharp increases in construction costs over the past two years.

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