Look for continued industrial construction gains despite a second half that saw weaker industrial production, declining orders, and fading capacity utilization, spending on industrial buildings soared last year.

After recording only modest net growth between 1996 and 1998 – and plunging by 13.8% during 1999 – total industrial construction spending increased by 16.5% between 1999 and 2000. In addition, an increasing share of the dollars committed by industrial companies to improving their operations went to expanding or renovating production facilities.

Then 2001 started out even stronger. The year opened up with a stratospheric 38.9% growth year over year in January. But those levels were unsustainable. Year over year growth in February slowed to 22.2%, but will tail off a bit from there.

Anecdotal evidence suggests that manufacturers are more cautious about adding or retrofitting industrial space during this period of economic uncertainty. It's worth noting that much of the spending last year was for e-commerce distribution and fulfillment facilities and for an expansion in semiconductor fabrication plants. And neither area is likely to contribute anything more to growth during 2001.

Nevertheless, we're still forecasting 5.5% growth in overall industrial construction spending during 2001 and 4.9% growth in 2002. The primary reason for continued optimism about industrial sector building expansion is the current low volume of vacant space. And unlike the office market sector, where dot com shutdowns and layoffs have thrown a large amount of space onto the rental market in a very short period of time, there's been relatively little additional industrial/warehouse space coming back to market so far in 2001.

In fact, the nation's industrial vacancy rate dropped to 5.9% during the fourth quarter of 2000, according to a survey done by the commercial/industrial brokerage firm of Grubb & Ellis. This is the first time that the rate has dropped below 6% since 1985. The lowest rates were recorded in the San Jose and Seattle metropolitan areas, while well-above-average rates were registered in Louisville (17.5%), Pittsburgh (15.5%), and San Antonio (15.5%).

Grubb & Ellis notes that tenant demand for industrial space has been fueled during the past several years by the growth of e-commerce, the consolidation of distribution facilities, rapidly changing manufacturing and distribution technology, and burgeoning international trade. These factors will not have as positive an impact on the industrial market during the next 2 years as they have over the past half-decade, but vacancy rates aren't likely to skyrocket either since we should see much less in the way of new industrial construction.