Demand for industrial space remained tepid in Q3

Demand for industrial property in the United States grew at an annualized rate of slightly more than 1 percent in the third quarter, indicating continued tepid demand for industrial space, according to a study released Wednesday by the NAIOP Research Foundation, formerly the National Association of Industrial and Office Properties.

According to the report, the annualized growth rate of 1.16 percent in the third quarter was in line with the forecast of 1 percent growth and is consistent with readings during the past several quarters, which have ranged between 1.0 and 1.26 percent, the report said.

The current annualized rate of growth in the quarter is at the low end of the historical norms of 1 to 2 percent a year. The findings correlate with the sub-par growth characteristic of the U.S. economy, according to the report.

Despite that, the quarter marks the fifth consecutive quarter of positive growth in industrial demand, following seven prior quarters of deep contractions, the report said.

The report predicted that industrial demand would show continued stagnation, a troubling sign for the category heading into 2012. Demand in the fourth quarter will grow at a 1.09-percent annualized rate, which again is at the low end of the historical range, the report said.

Strong demand growth isn't expected until next year, and that is contingent upon the overall economy's expanding at a normalized rate, the report said.

"Sluggish industrial demand signifies that the industry, and this property sector in particular, are reliant on much-needed growth in the national economy," said Thomas J. Bisacquino, NAIOP president and CEO, in a statement. "Although minimal, the positive growth industrial [space] has experienced during the past several quarters is a small sign of optimism. It is evident that the industry won't return to more normal rates of growth until the overall economy stabilizes and businesses begin to spend again."

Joanne Bestall, a representative for real estate and logistics services giant Jones Lang LaSalle (JLL), said her firm agrees with the NAIOP assessment. Her comments were echoed by Stephen F. Blau, senior director at Wayne, Pa.-based real estate advisory firm Newmark Knight Frank Smith Mack. "There has been a marginal improvement in net absorption—and a reduction in vacancy—but without any discernable improvements in rental rates, or selling pricing," Blau said.

Net absorption is defined as the amount of space being leased relative to the space being returned to the market.

The NAIOP forecast is based on Purchasing Manager Index (PMI) data provided by the Institute for Supply Management (ISM), Index of Manufacturing Output (IMO) data provided by the Federal Reserve Board, and data on "net absorption" provided by real estate giant CB Richard Ellis Econometric Advisors.