U.S. industrial property sector continues recovery

The long-moribund U.S. industrial property sector, which showed signs of life in the second quarter of 2010, saw a pickup in activity in the third quarter, driven by increased leasing from large corporations, according to Jones Lang LaSalle's (JLL) third-quarter report on North American industrial trends released Tuesday.

Large corporations are taking advantage of still-low prices to consolidate to better locations or trade up to better-quality space, according to JLL's third-quarter North America Industrial Outlook report.

"Markets with strong logistics infrastructure that serve as distribution hubs to large populations are seeing the greatest growth levels," said Craig Meyer, managing director and head of Jones Lang LaSalle's logistics and industrial services group, in a statement.

Meyer said overall industrial vacancy rates remained relatively unchanged from the second quarter, holding steady at 10.4 percent. However, net absorption—the amount of space being leased relative to the space being returned to the market—has progressed into positive territory at 9.3 million square feet for the quarter. That is the second consecutive quarter of occupancy gains.

The Philadelphia/Harrisburg region led all regions in the quarter with 2.5 million square feet of positive net absorption. It was followed by California's Inland Empire at 1.9 million square feet.

Year to date, the Philadelphia/Harrisburg region showed a net absorption gain of 6.4 million square feet. Other regions that have showed recoveries include Chicago with 4 million square feet of positive net absorption for the year to date, Houston with an absorption increase of 3.6 million, and Dallas/Fort Worth with 2.6 million square feet.

Meyer said companies with large space requirements drove deal velocity in the third quarter. In addition, many transactions were new leases, "perhaps signaling the end of the dominance of renewals and consolidations," he added.

"Landlords remain aggressive to keep occupancy levels stable and the market as competitive as possible," Meyer said. "With construction still limited and big box space scarce, we are seeing some rent stabilization in some of the aforementioned major industrial hubs."

Still, the average third-quarter industrial asking rents across the nation fell 1.2 percent, marking the 10th consecutive quarterly drop since early 2008, JLL said. This trend will continue into 2011, at least in smaller regional markets, the report said.

All told, more than half of all markets reported a reduction in the amount of sublease space in the quarter, an indication that supply could be tightening and that higher rates could follow, the report said.