Warehouse/distribution market will continue to improve in 2005

Leasing activity for the nation’s warehouses and distribution centers continued to recover during the second half of 2004, suggesting continued improvement in 2005, according to a new study from ProLogis.

“We have long said that as the U.S. economy regains its traction, so will the recovery of the nation’s warehouse and distribution markets,” says Leonard Sahling, head of the ProLogis Research Group. “We saw this during the second half of 2004, and we’re anticipating more of the same for 2005.”

According to ProLogis:

For the top 30 markets, the overall vacancy rate declined to 9.6% at year-end 2004 from 10% at mid-year and 10.3% at year-end 2003.

Demand surged during the closing months of 2004, leading to a total net absorption of 111 million square feet during the year, a respectable 2.7% increase in total occupied space.

After a sluggish start during the first half of the year, construction activity gained momentum and ended the year on a strong note. For 2004, newly started warehouse/distribution facility projects amounted to 95 million square feet, up 30% from 2003.

The near-term outlook calls for the warehouse recovery to continue to unfold in much the same way that it did last year. The main risk to this forecast is that new supply will shift into high gear and overwhelm net absorption.

Seven of the top 30 markets appear to have recovered fully from the 2000-02 cyclical downturn: the L.A. basin (including the Inland Empire), Seattle, Las Vegas, Reno, Phoenix, south Florida, and northern/central New Jersey.

The good news is that the number of markets lagging behind the recovery is down from nine to four, but these “laggards” – including Dallas, Denver, eastern Pennsylvania and Baltimore – are slightly worse off than last year at this time.

While many analysts have been projecting that the strength displayed by the U.S. economy over the last half of 2003 will extend into 2004, the ProLogis Research Group believes that a slowdown is likely in the nation’s economic expansion. Sahling ias quick to point out that this does not mean that the economy is headed for another recession, just that its growth will be somewhat slower than it’s been recently.

“With rising energy costs and interest rates, the economy will continue to grow, but at a slower rate than we have seen recently,” Sahling predicts. “We’re more likely to see 3% to 4% annual growth in the GDP rather than the 6.1% annualized pace of the last half of 2003.”

Sahling adds, “The pace of the current recovery in the nation’s warehouse and distribution leasing markets accelerated in the second half of 2004, and especially in the fourth quarter. We believe that this momentum will carry over into the current year.”


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