Industrial market 'good place to be' in 2006 and 2007

SPECIAL TO CONTRACTOR A WEAKENING U.S. dollar and falling oil prices are among the factors that should help the industrial construction market gain strength in 2007. Eli Lustgarten, senior vice president of Cleveland-based Longbow Research and principal of ESL Consultants in St. Louis told members of the National Truck Equipment Association last fall that real gross domestic product growth remains

SPECIAL TO CONTRACTOR

A WEAKENING U.S. dollar and falling oil prices are among the factors that should help the industrial construction market gain strength in 2007.

Eli Lustgarten, senior vice president of Cleveland-based Longbow Research and principal of ESL Consultants in St. Louis told members of the National Truck Equipment Association last fall that real gross domestic product growth remains strong, capital spending continues to strengthen, manufacturing output is improving, inflation remains under control and corporate profits are strong.

"The industrial sector will still be a good place to be in 2006 and likely 2007," Lustgarten said.

The American Institute of Architects Consensus Construction Forecast Panel in mid-2006 predicted a 7.6% increase in the industrial construction market this year after a 16.9% increase in 2006.

"Despite several concerns with the fundamentals of the nonresidential construction market — including rising short-term interest rates, ongoing inflation in key construction materials prices and recent concerns over the economic outlook — the AIA is expecting solid levels of activity through the remainder of 2006 and through 2007," said Kermit Baker, AIA's chief economist and formerly a regular contributor to CONTRACTOR. "After adjusting for inflation, the AIA panel is anticipating a 6.3% increase in nonresidential activity in 2006, and an additional 6.2% [in 2007] with growth evenly balanced between the commercial/industrial and institutional sectors. If achieved, this would be the best two-year period for nonresidential construction activity since this market grew by about 30% in 1997-1998."

U.S. manufacturing will continue to outpace the rest of the economy in 2007, as it has since late 2003, said Dave Huether, chief economist of the National Association of Manufacturers. "In manufacturing, you'll see a little slower growth [in 2007] than the 5% or 6% growth we've seen in the last couple of years," he told MRO Today. "That's not saying every manufacturing sector will grow at 4% or 5%. Some will grow at 6%, 8%, 9%, and others will grow in the 2% to 3% range."

He noted that U.S. companies moving overseas today tend to focus more on opening markets in new regions and less on producing products more inexpensively for domestic customers.

"You'll still see U.S. manufacturers moving overseas, but that's less of a phenomenon of finding a cheaper labor market to produce products to send back to the United States, than it is of investing in high-growth markets overseas to serve their customers," Huether said. "A lot of it depends on the type of products."

Trade and distribution will continue to drive the industrial real estate market, according to the National Association of Realtors, which also noted a lack of suitable inventory in traditional and inland ports that is fueling buildto-suit facilities. The situation has created a landlord's market in many areas with available space the tightest the market has experienced since 2001. In addition, orders for durable goods are rising, and some urban industrial properties are being redeveloped for mixeduse and residential purposes.

"The office and industrial markets continue to shine, supported by job growth and trade," said David Lereah, NAR's chief economist.

Vacancy rates in the industrial sector should average 9.7% to 9% this year, a steady downtrend since early 2004 when they were close to 12%. Rents are expected to increase 3.5% to 4% in 2007, while new industrial space coming online is estimated at 155 million to 160 million sq. ft., NAR said.

Trade with China is having a particular impact on demand for industrial facilities on both coasts, NAR said. Traffic in Southern California is so congested, it noted, that ships are traveling through the Panama Canal to get their cargo to East Coast markets, notably in Florida. Although the greatest demand remains in port markets, new construction is popular in secondary markets and other areas with lower land values and fewer site remediation concerns.

The areas with the lowest industrial vacancies are West Palm Beach, Fla.; Los Angeles; Miami; Orange County, Calif.; Fort Lauderdale, Fla.; and Tampa, Fla., all with vacancy rates of 5.5% or less, NAR said.

The highest industrial market rent per square foot is in San Diego; Orange County, Calif.; and Los Angeles. The highest prices being paid for industrial properties, outside Manhattan, are in northern Virginia; San Jose, Calif.; and Las Vegas.

While its present forecast is positive, potential risk factors for the future include oil prices, interest rates and higher construction costs resulting from global economic expansion, NAR said.