Taking a closer look at the gap between industrial property sales and lease activity

While we've experienced market downturns before, previous slumps were easier to climb out of and easier to predict. In my September 2008 column for New York Real Estate Journal titled, "Where is the sales gap and how do we get past it?" I incorrectly projected an increase in the supply of industrial buildings. The reality is the inventory of buildings for sales has not increased the way I expected it would and there is still not an abundant supply of buildings available for sale which would have placed downward pressures on prices. Drive around any industrial park and you will see a lot of signs on warehouses, manufacturing/distribution facilities. However, the signs do not include the size of the building or if the building is for lease or sale. The gap is, however, starting to contract. A Closer Look at the Gap in the Market Currently, in the 7,000 to 15,000 s/f range, the market is fairly stable. This is the category where most of the transactions are occurring with deals closing in the $80 to low $90 per s/f range. These same facilities were commanding $100 to $120 per s/f three to four years ago. Despite the fact that buyers are in no hurry to make commitments and are playing their cards close to the vest, the activity is picking up and that's a positive sign. Another sign that the sales/lease gap may be closing are the sales of buildings in the 40,000 to 60,000 s/f range in the mid-to-high $50 to mid-$60 per s/f area. In this segment of buildings, buyers are motivated to complete sales transactions. They also are more educated about market conditions and are convinced they are in the driver's seat. For their part, sellers are accepting this reality, but are relieved that the banks are now working more readily with mortgagors. Looking at the leasing market, where the inventory is ample, there is a window of opportunity for tenants looking to expand. They recognize the opportunity to capitalize on the high supply/low rate conditions-a market phenomenon of lease price rates I haven't seen in at least 15 years. On Long Island, the rates are at their lowest point since 2006. Landlords are also offering new concessions in order to secure tenants; another incentive for those looking to lease at lower rates and apply the remaining capital for new equipment and production line optimization. Long Haul Ahead If you look at the overall U.S. economy, there are some encouraging signs: increasing lending and investment activity, greater liquidity, rising manufacturing activity, the leveling off of product inventories and growing global trade volumes. Still, you can't overlook the fact that industrial buildings are remaining on the market much longer than I and many others would have believed. I expect we have a long haul ahead before we witness prices regaining their previous levels. Right now, we have sellers who are placing their buildings for lease at considerably reduced rates while they wait out the storm. This is happening in parallel with the underlying market condition of many more buyers than tenants in the market. The Gap Looms We started the first quarter of 2010 with a modest increase in industrial property vacancy rates and according to a Moody's Investors Services report issued in July, the second quarter also recorded a slight increase in industrial property vacancy rates nationwide from 13.9% to 14%. On the plus side, Moody's placed New York among the best five commercial real estate markets in the second quarter along with Honolulu, Los Angeles, Boston and San Francisco. The only place where the sales gap has connected is in the multi-tenant office market, but even that is being hindered by the amount of equity lenders are requiring for financing. I can't help thinking that something has to give-but when? Right now, the gap between industrial sales and leases looms. Stay tuned. Ralph Perna is an executive managing director at Newmark Knight Frank, Melville, N.Y.