Industrial construction strengthens, as vacancy rates remain low

By By DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 8/1/2000

Investment activity by U.S. manufacturers strengthened considerably during the early months of this year, proving that the disappointing capital spending numbers at the end of last year were not the start of a long-term downward trend in growth. Instead, it is now clear that the temporary slowdown was a reflection of investment caution in light of concerns about the Y2K millennium bug.

Total business spending for new plant and capital equipment (including new buildings, computers, conveyors, industrial trucks, and inventory control hardware/software) grew at an astounding 23.7% annual rate during the first quarter of this year.

Following a long period of flat-to-down trends in industrial construction spending, the market showed remarkable improvement during the first 4 months of this year. Through April 2000, industrial construction spending was running 2.7% ahead of the 1999 pace and gaining momentum.

New industrial building construction in April of this year was 14.8% above the dollar value of work on manufacturing and warehouse buildings during the same month of 1999. It is also at the highest annualized level ($30.11 billion) since December of 1998. Finally, we're seeing improvement in industrial construction fundamentals, which are tied largely to the fact that over-capacity in many industries is finally being swallowed up by improving global demand. The nation's manufacturing sector should remain healthy enough to support higher levels of investment in both new equipment and buildings during the next few years.

However, the nation's overall industrial vacancy rate has declined for four consecutive quarters, even in the face of constantly expanded supply. The national availability rate for industrial space in large buildings (100,000 sq. ft. or larger) declined from 8.1% during the final quarter of 1999 to 7.8% in this year's first quarter. The January-March 2000 vacancy rate was 0.6 % lower than during the first quarter of 1999. This information comes from a survey from CB Richard Ellis, a commercial brokerage/real estate information firm, that measures the supply of available space in manufacturing plants and warehouses for both existing and under-construction (within 6 months of completion) buildings.

Vacancy rates for industrial space during the first 3 months of this year ranged from lows of 3.9% in Portland, Ore. to 27.9% in Fort Lauderdale, Fla., and 15.3% in the Washington, D.C. metropolitan area. Between the first quarter of 1999 and the first 3 months of this year, 27 of the 42 metropolitan areas surveyed, recorded declines in their industrial vacancy rate.

With industrial vacancy rates low and investment/construction spending high, the fundamentals supporting long-term growth in the materials handling industry are strong. Bottom line: Trends in most sub-sectors of both manufacturing and non-manufacturing (especially warehousing and distribution) activity during the next couple of years continue to look favorable.