Construction activity has always been a good benchmark of the industrial sector’s strength. However, with the extended lag time between concept and completion, it may be better viewed as a confirmation of where the industry has been over the last 12 to 18 months. With that in mind, it should come to no surprise that construction activity is down, and down drastically. As of midyear 2010, construction completions totaled 8.8 million sf with a year-end projection of 16.7 million sf. This is a far cry from the 62 million sf that was completed in 2009 and the 136 million sf that was completed in 2008.
Another interesting trend is the flight from speculative development. Historically, and across many fluctuations in total deliveries, one thing has remained consistent… speculative development has far outpaced build-to-suit activity, usually by a pace of about 2.5 to 1. So far in 2010, this long-standing trend has been reversed.
With vacancy rates spiking to 10.8%, and the resulting glut of space on the market, speculative development has all but dried up. Why? In one word, competition. With so much vacant space, there are existing options to fit most occupier needs. The prospect of adding additional vacant inventory to this already flooded market, more often that not, will be a losing endeavor. C&W expects this lack of speculative development to continue until the vacancy rate levels off somewhere around 8%.
What little development remaining is primarily build-to-suit of specialized facilities. Despite the high vacancies and tenant-friendly market, occupiers with unique requirements and/or specialized uses may still find new construction a viable and cost-effective option.
What this means for tenants and landlords…
For tenants, while options abound, this is a time to be much more prudent about both your immediate and future space needs. It’s easy to become complacent in such a tenant-friendly market, but with more options, comes a greater potential to get locked into a less-than-ideal facility based solely on short-term savings. This is an ideal time to look to the future, analyze the full scope of both short- and long- term costs and savings, and use these market conditions to position your business as a market leader now and for years to come.
On the landlord side, controlling inventory is a good trend toward equalizing the vacancy rate, thus driving a healthier market. Just as a rising tide lifts all ships, a healthy industrial market will benefit everyone. With our belief that construction will stay relatively stagnant until vacancy rates dip back down, landlords should view this as a light on the horizon and another potential sign that the worst of this economic crisis may be behind us.