Industrial Preleases Lower Than Expected

WASHINGTON, DC-By and large, activity in the metro area industrial market remains steady, according to a new report by GVA Advantis. However, preleasing of space currently under construction is lower than expected, which raises concerns that vacancy rates might be higher than average in coming quarters.

“We usually see preleasing rates that are higher than 26%,” Tonya Ginter, director of Research, GVA Advantis, tells GlobeSt.com. On the other hand, she adds, “we are seeing industrial condo sales remain fairly steady. So the sales market is doing pretty good.”

According to the report, the Washington, DC-area flex-industrial market ended the second quarter of 2006 with a vacancy rate of 11%–a slight increase from the first quarter 2006 rate of 10.6%. Supply, meanwhile, is increasing. During the second quarter, 705,875 sf of new construction delivered in the DC area, compared to 385,306 sf delivered during the first quarter. It is the 2.5 million sf under construction at the moment–with 1.3 million sf in Maryland and 1.2 million in Virginia–that concerns some industry watchers.

“There is still a lot of demand, a lot of tenants in the market, so we are hoping that product will be leased up quickly. But there is a growing concern that we continue to build there will be an oversupply given the current vacancy rates,” she says.

Other factors are at work, as well, to the detriment of the space. In general, the financials of many tenants in the metro area are improving, Ginter notes, which at face value would be a welcome development. “But many of these firms opted for flex or industrial space because they felt they couldn’t afford class B office space. Now they can.”

Also, other consulting firm reports have noted a shift in industrial warehouse/distribution economics. Delta Associates, for example, has projected declines in occupancies for the rest of the decade in the metro area, as well as nationally, due to tech advances–RFID technology in particular–that help companies make more efficient use of the space available to them.

Much depends on the submarket however. The Washington Dulles International Airport vacancy rates are at less than 6%, according to Mark Levy, vice president and market officer for ProLogis, which has just begun the second phase of development at ProLogis Park Gateway, a 50-acre industrial park.