Consumer spending continues to decline, as rising unemployment and a prolonged recession force consumers to cut back. In conjunction, both imports and exports were down by 27 percent and 16 percent, respectively during the first quarter of the year. Manufacturers' shipments of durable goods have been declining since March 2008, and in June of this year were down 26 percent at an annual rate. In addition, GM's and Chrysler's restructurings have resulted in factories being closed. Within this economic framework, demand for industrial space has been shrinking by about 150 million square feet during the first half of the year, lifting vacancy rates to about 13 percent and depressing rents.

For the first quarter of the year, investments in industrial properties were down 83 percent compared with the same period in 2008. Transaction volume reached only $1.4 billion during the quarter. Compared with the market peak of $12 billion in the first quarter 2007, the sales volume illustrates the stark reality of commercial real estate. The industrial market registered a slight uptick during the second quarter-May sales were 15 percent higher than April totals, with 30 properties changing hands at $392 million.

As the numbers illustrate, the number of industrial transactions is low, particularly for flex properties. During the first quarter 2009, only 21 flex properties were traded, compared with 39 warehouse deals. Pricing for industrial transactions has been on a decline, although, due to the small number of deals and a sizeable gap between buyers and sellers, it has been difficult to establish. Industrial prices range from an average of $59 per square foot in the South east to $176 per square foot in the Northeast. Flex space continues to demand a higher price than warehouse properties. Average cap rates have moved significantly higher over this period, with recent deals averaging 8.3 percent. Property offerings have been outpacing closings by a wide margin for both flex and warehouse spaces.

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Regionally, on a year-over-year basis, the greatest declines in industrial transactions were seen in the following markets:

  • The Southwest down 92 percent
  • The Southeast down 89 percent
  • The Midwest down 87 percent
  • The West down 84 percent
  • The Mid-Atlantic down 83 percent
  • The Northeast down 82 percent

Across the country, there were 15 primary and secondary markets with transaction declines of 100 percent, including Philadelphia, Cincinnati, Cleveland, Long Island, Nashville, Houston and Salt Lake City. On a year-over-year basis there were no markets with positive investment changes.

While distressed commercial sales are on the rise across all property types, the industrial sector has recorded fewer troubled properties than any other sector. There were 353 distressed industrial properties totaling $1.7 billion in June. The dollar volume of distress represents only 1.5 percent of the total distress on the U.S. market. Most troubled industrial properties are concentrated in the West, with Los Angeles topping the list, at 52 properties and $442.5 million. The other region experiencing difficulties is the Southeast, with 71 properties and $446.3 million in distress. Looking at industrial distress by lender type, 29 percent resides in CMBS, with another 24 percent held by Wall Street firms and 21 percent by international and national banks.

Analyzing the buyer composition for industrial space, private investors and user/seller financing have become the main sources of funding. As of the first quarter 2009, private investors accounted for 44 percent of acquisitions, four percent higher than the same period a year ago. Meanwhile, users accounted for 29 percent of retail buyers, a significant change over last year when they accounted for only 11 percent. Institutional investors maintained their proportional share of buyers. International buyers have pulled back from the market this year, after constituting 22 percent of buyers last year.

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The top industrial buyers so far in 2009 include:

By Value of Transactions

By Number Transactions

USAA Real Estate

Hampshire Cos

Alexander & Baldwin

Columbia University

HRPT Properties Trust

USAA Real Estate

Cobalt Capital

AIC Ventures

AIC Ventures

Cobalt Capital

While there are a few promising signs that some businesses are considering increasing production, following a year of inventory overhang, it is likely that the industrial sector will continue to see weak fundamentals for the remainder of the year. On the investment side, transactions will likely continue at a muted level. However, based on recent data, June is poised to record an improvement in sales activity over May.