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In constructing Site Selection/NAI's Industrial Location Index Survey for North America, we consider the overall economy; real estate market conditions; labor market conditions; and transportation and logistics, to determine which markets offer the greatest opportunity. With growing global demand for goods and cross-border commerce on the rise, we remain bullish about the industrial sector.    In the U.S., non-durable goods sales continue to rise, while durable goods sales are at historic highs. Automobile sales - though not necessarily of domestic auto brands - remain strong, in spite of high fuel prices, which are the result of booming global demand meeting an unchanged supply. Strong economic growth has kept energy consumption relative to GDP flat for five years, as energy consumption as a percent of GDP stands at roughly half of what it was 25 years ago. Manufacturing capacity utilization rose by more than 500 basis points over the last three years, though it remains approximately 200-300 basis points below norm, requiring another two years to achieve balance. However, the days when producers had no pricing power are receding as this excess capacity is absorbed. Commentary    There does not appear to be a clear cost advantage to leasing industrial property in Mexico or Canada versus the U.S. In fact, aside from a few notable high-end U.S. markets, such as Baltimore, New York, Phoenix, and San Francisco, most markets fall into the US$3-7 (NNN) per square foot range, regardless of national borders.    From a construction cost perspective, Mexican markets are consistently lower cost ($15-$27 psf), in comparison to markets in Canada ($30-$80 psf) and the U.S. (most falling in the $20-$65 psf range). However, land costs are generally comparable across borders, with a few notable exceptions (including Miami, Los Angeles, New York, San Francisco, Seattle, and Mexico City). Investors often lose sight of the fact that replacement cost (at reasonable land values) is the key to successful investing in industrial properties, as it is generally not a complicated product to create or permit. Rental rates fall when markets are oversupplied, and because of the short development cycle for industrial product, excess demand conditions are generally short-lived. As a result, industrial property down-cycles tend to last longer than the up-cycles.    Using a 7-percent vacancy rate as a benchmark for an industrial market that is "in balance," we observe that the Canadian markets are in better balance than either U.S. or Mexican markets. Of the Canadian markets, only Ottawa (7.5 percent) is (slightly) above this vacancy rate benchmark. Of the U.S. survey markets, Buffalo, Chicago, Los Angeles, New York, Newark, and Seattle appear to be in balance, while Houston is near the cusp at 7.1 percent. Note that Chicago, Houston, and Seattle did not make the cut as of our last survey six months ago. At the other end of the spectrum, vacancy rates in Atlanta, Baltimore, Dallas/Ft. Worth, Detroit, Memphis, New Orleans, and Philadelphia are all above 10 percent, indicating substantial oversupply. In Mexico, only Monterrey and Tijuana fall below 7 percent, while Mexico City suffers from a 20 percent vacancy rate.    Turning to labor costs, Mexico holds the clear wage advantage, with average production line wages running about $1 to $2.70 per hour, versus about $7 to $32 per hour in the U.S., and $8-18 per hour in Canada. These lower labor costs are the main factor which makes the overall cost of doing business in Mexico significantly lower than its northern neighbors, although some of this is offset by lower efficiency levels.    Examining transportation costs, with the exceptions of Guadalajara ($1.50/mile) and Mexico City ($1.71/mile), it costs about $1 per mile to ship a full trailer in both Canada and Mexico. In contrast, comparable shipping costs in the U.S. range from $1.15 per mile in Phoenix, to as much as $5 per mile in San Francisco. Note that many of the U.S markets with higher transportation costs are port cities, while the Mexican markets are often hundreds of miles from the nearest port. We continue to expect oil prices to fall to roughly $30 per barrel by the end of 2006, absent meltdowns in Saudi Arabia, Kuwait, Russia, Iraq or Iran. — Linneman Associates www.linnemanassociates.com