Local industrial market hard hit by economy, unemployment
After last week’s gloom-and-doom column about the sad state of Southwest Florida’s office market, I wish I could deliver a brilliantly upbeat report about the local industrial market. But since I make it a policy not to lie, I’m afraid I must convey more of the same discouraging statistics.
The following industrial market update is based on an analysis of Cushman & Wakefield’s latest research data for our area. As you’ll see, our market faces substantial challenges in 2009, due to the recessionary environment of the past year.
Economy
The Fort Myers/Naples industrial market continued to weaken in the third quarter of 2008 due largely to the lack of new industrial-related jobs. While it’s no surprise that the ongoing housing correction is driving the market’s bleak near-term economic outlook, the recent credit market chaos also has had a significant, negative impact on the region’s economy.
Approximately 11,400 jobs were lost in the combined metro areas between the third quarter of 2007 and the third quarter of this year, most of them in the construction, retail and professional/business service sectors. As a result of this substantial job loss, the area’s current unemployment rate is one of the highest in the Southeast, exceeding 10 percent for Lee and Collier counties combined.
The slowdown in job growth, which directly correlates to demand for industrial space, facilitated another sluggish quarter for the Fort Myers/Naples industrial market. Just as overall vacancy escalated to its highest level in 18 months, average asking rental rates continued to trend downward and speculative construction activity declined dramatically due to the sustained decrease in tenant demand.
Overview
Market-wide, overall vacancy registered 10.1 percent at the close of the third quarter of 2008, up 2.8 percent from the vacancy recorded this time last year. This is the highest vacancy rate of all the major industrial markets in Florida.
The most significant year-over-year increases in vacancy occurred in warehouse/distribution and office service space types, which increased 2.8 percentage points to 9.2 percent and 1.8 percentage points to 21 percent, respectively. Also, as demonstrated in the Fort Myers/Naples office market, a significant portion of this increase in vacancy can be attributed to the nearly 1.4 million sf of new office space delivered over the past year, the majority of which (58.4 percent) remains vacant.
This increase in vacancy, coupled with weakened tenant demand, has resulted in a decrease in asking rents for the sixth consecutive quarter, depressing the market’s average triple-net asking rate to a level that hasn’t been recorded in the market in more than four years. Market-wide, the direct net asking rental rate averaged $7.75 per square foot (psf) at quarter-end, a decrease of $0.19 psf vs. the previous quarter and $1.53 psf from this time last year.
Manufacturing space, which accounts for 16.6 percent of the industrial space in the market, experienced the largest decrease in rents over the past year, decreasing $3.12 psf since this time last year, to a current average of $6.45 psf.
Furthermore, landlords are becoming more aggressive than ever with concessions such as free rent and increased build-out allowances. In certain submarkets with the highest vacancy rates, a properly negotiated lease can result in savings of up to 20 percent in a tenant’s occupancy costs.
Forecast
Even though the local economy continues to labor under the weight of the correcting housing market and increase in unemployment, the area’s long-term growth dynamics remain strong, particularly in the industrial sector. Just remember, that’s the long-term view.
More immediately, I predict that the Fort Myers/Naples industrial market will continue to feel the negative affects of the declining local and national economy. Because of this, my staff and I anticipate vacancy rates will continue to increase, albeit at a slower pace than the past year, as demand from tenants remains anemic.
To recap:
n LEASING ACTIVITY fell significantly in the third quarter of 2008 and is expected to remain at historically low levels through early 2009.
n OVERALL ABSORPTION will be flat to negative over the next few quarters.
n SPECULATIVE CONSTRUCTION activity should come to a halt in the market due to decreased demand and increased vacancy.
All of this strongly suggests that weak tenant demand in Southwest Florida will likely persist through much of 2009. However, as the excess space is absorbed, I expect that rental rates will stabilize. Exactly when those rates will rebound is contingent upon when our unemployment picture begins to improve.
Market research leads me to believe that the rebound will occur at some point during the second half of 2009. As it does, there will be increased demand for industrial space in our local market.
Gary Tasman is executive director of Cushman & Wakefield’s Southwest Florida office. For more information, please contact him at (239) 489-3600 or gary.tasman@cushwake.com.