As the economy
rebounds, more boxes of widgets, gizmos and thing-a-ma-jigs will
need to be stored. As a result, we are very optimistic about the
industrial sector. The majority of U.S. industrial markets that
are tracked by Linneman Associates are expected to strengthen through
2005, as absorption has turned positive due to growing demand and
minimal construction. However, it will take time for markets to
fully strengthen, resulting in small rental increases until vacancy
rates approach 6-7 percent. For the most part, U.S. and Mexican
industrial markets have yet to achieve this targeted vacancy rate
on a consistent basis.
The five Canadian markets in this survey are all
relatively strong, with vacancy rates no higher than 6 percent.
The only cause for concern in Canada is Toronto?s relatively large
number of industrial facilities with greater than 100,000 available
sq. ft. (93,000 sq. m.). This is a data point we will watch closely
in the next installment of the index.
While the general trends are positive, investors
must consider four macro factors that impact specific markets: (i)
productivity and (ii) hours worked, which together determine the
quantity of ?inventory? being created; (iii) labor costs, which
can determine production location; and (iv) supply competition,
which can emerge more quickly than you might imagine.
Productivity growth remains strong, running well
in excess of 3.5 percent per annum. However, productivity growth
will slow as expanding payrolls bring less productive workers back
on the job. In addition, emergency workloads will be scaled back
to normal. As a result, over the next two years, we expect productivity
growth to average 3 percent. Also boding well for North American
industrial property markets, the manufacturing sector has seen a
notable rebound in hours worked, driven particularly in the United
States by the renewed strength of orders for both defense and non-defense
goods. A recovery in durable goods demand is under way, with the
computer and software sectors experiencing notable increases.
Mexico still holds the clear advantage from a
labor cost perspective at $1-2 per hour versus $10-15 in the United
States. Given its lower standard of living, the overall cost of
doing business in Mexico is significantly lower than its northern
neighbors. Rental rates, however, are generally comparable across
borders.
Finally, investors often lose sight of the fact
that replacement costs (at reasonable land values) are the key to
acquiring these industrial properties, as it is generally not a
complicated product to create. Rental rates fall when markets are
oversupplied, but because of the short development cycle for industrial
product, supply shortages do not last very long. As a result, industrial
property down-cycles tend to last longer than the upcycles.
? Linneman Associates
www.linnemanassociates.com
