Has Industrial Hit Rock Bottom?

It’s definitely a tenant’s market, so where are the tenants? At no point in industrial real estate history has there been more aggressive deals on offer to tenants, and this is evident in Central Florida.

Rental abatements for up to a year, asking rents at half of standard rates, broker incentives and strong tenant improvement dollars have been put in place. But the tenants are not taking the bait. Why?

It is difficult to pinpoint one particular reason, but the most obvious is economic anxiety and nowhere else is more anxious than Florida, especially Orlando which continues to be plagued by the housing fallout. In fact, 20% of the construction workforce has been eliminated since mid-2008.

Unfortunately, there is no quick fix to getting the economy back on track. Every industry that supports industrial real estate including housing supplies, convention servicers, food distributors and retailers are wary of the unknown. Tenants are fearful of expansion and commiting to long-term leases as they don’t know what the future holds. They are sitting on the fence and taking a wait-and-see approach.

The credit markets have seemingly come to a standstill and it is virturally impossible for companies to obtain funding for their business ventures. The banks are still not approving loans and the federal government is not handing out stimulus packages to wholesale/distribution companies.

Lenders know that within the next few years, commercial properties are going to be worth less than their current loans and before long they will have their hands full of foreclosed loans. Investors are sitting on the sidelines waiting for this happen, so they can buy properties for 50 cents on the dollar. Hence, banks are reluctant to lend and want to keep as much money aside for when these foreclosures occur. Developers are going through the same capital freeze.

The current Orlando unemployment rate is 11%, a level not reached since 1975. One of our largest industries is the convention services industry, which has been hit hard as companies have cut their budgets, but also owing to US government leaders advising agencies not to spend money on conventions and meetings in tourist destinations like Orlando and LasVegas. The lack of convention business has had a serious effect on our hotels, restaurants, shops, car rentals, service employees and convention service companies and of course, industrial real estate has also fallen victim.

With a vacancy rate of more than 13%, the highest in over five years, the Orlando industrial market could soon jump to 15% as sublease space continues to hit the market. Total industrial net absorption has been negative in five of the last six quarters and is around negative 1.9 million square feet.

Rents have decresed for the third consecutive quarter and are down 10% from year-end 2008. Tenants remain reluctant to commit to new lease deals and take advantage of the concessions, resulting in stagnant deal volume. We excpect the tenant-favorable conditions to continue well in to 2011, but hope for deal velocity to gather pace again soon after.

How do we resolve the problems? We need a shot of positive economic news. We need the credit markets to loosen their reins so companies can borrow money to operate and begin hiring again.

If you are a tenant wanting to take advantage of a very soft market, now is the time to do something. No one knows when this “low rate market” will end or if we have hit bottom, but we do know that when tenants want the landlords to pay them to lease space in their buildings, the bottom should have been truly reached.

The views expressed here are those of the author and not of ALM’s Real Estate Media Group or its publications.

Susan Ruby is vice president and director of Florida industrial services with Jones Lang LaSalle in Orlando.