Even though the demand for space is slowly beginning to increase, for companies in need of new or additional space, the current economy continues to provide good opportunities for bargain hunters.

ProLogis ( www.prologisresearch.com ), a leading global provider of distribution facilities, puts together two reports each year on the distribution property leasing markets in the United States and Canada. The free PDF report, called the “U.S. and Canada Property Market Review, Year End 2009” (download from above site), takes into account the state of the leasing market in 31 major real estate markets.

Looking at the latter half of 2009, Leonard Sahling, first vice president and head of research for ProLogis, is quoted as saying that the U.S. economy began its recovery, but that the leasing market lagged a bit behind. According to Sahling, the market saw its highest vacancy rate at about 10% in the middle and end of 2009. Asking rents hit their lowest point at the same time, after five consecutive quarters of decline. On average, rents slipped around 15% to 20% during the decline.

Groundbreaking for New Properties – Stalled

The ProLogis report indicates that new starts have slowed to a trickle and consist mostly of build-to-suit projects that have been pre-leased to specific customers. Sahling says that “credit market conditions have eased a bit in recent months, but lenders remain extremely tight-fisted, especially to commercial property developers”.

Sahling sees lots of reasons for the slow numbers. “As businesses recover, it takes a while to make deals,” he says. “Meanwhile, vacancy rates are high, so there’s lots of space to be had. There’s no need for new space. Plus, rents are so low that it’s not feasible to build new space right now.”

Add to that the credit crunch and you’ve got very little construction going on. Banks are still reeling from their problems, especially with commercial real estate loans. It will be awhile before banks will be in a position to provide more money for loans.

Location is a Big Factor

Every company that is considering leasing wants to find good space in a good location with the lowest possible rent they can find. They are also looking for energy efficient space that is less expensive to operate.

A big factor in the kind of deal you can make for your lease depends on the market you choose. Sahling says that some markets will have high or low rates no matter what – and right now it’s really just a matter of how far off the normal rates they are. He points to traditionally strong markets like Atlanta, Memphis, Louisville, and Indianapolis as likely candidates for early recovery, which means the rates in these markets will likely run a bit higher than in others.

According to the report, the hardest hit markets during the recession were places near ports. They suffered more because of the sharp contraction in world trade. The rate of recovery in these markets will depend on how quickly world trade recovers. Sahling says that at this time world trade recovery is tracking a bit stronger than anyone anticipated.

Pros & Cons of Leasing Verses Purchasing

One thing that is likely to remain constant is the trend to lease instead of buy DC space. “It’s been a long time since leading rates were down as much as they are right now”, says Sahling. He does not anticipate many cases where purchasing will be more appealing for some time to come.

However, companies also need to consider their potential requirements for or interest in materials handling automation when considering leasing an existing facility or building a new one, which can then be leased. The designs of some facilities are simply better suited than others in terms of support for materials handling systems inside them. Either way, companies need to think deeply about what automation may be deployed and the resultant physical facility requirements before any final agreement with an architect, builder, or leasing agent (see – “When Building a New DC or Leasing an Existing One, Many Factors to Consider in Terms of Physical Design”)

In addition to good rates, Sahling says that leasing offers several benefits that purchasing does not:

• Flexibility – If you purchase a facility and your needs change, you have a lot less wiggle room. Unanticipated growth, for instance, could be a problem if you need additional space and don’t have room to build on.
• Maintenance – If you own your space, the costs and burdens of maintaining it are firmly on your shoulders. If you lease your space, in contrast, you have a landlord to turn to when things go wrong.
• Management of Building – When leasing, someone else handles all the management of the building. “they’re the experts,” Sahling points out, “so it’s nice to be able to hand this task over.”
• Costs – right now, rents are at a low point, so the overall cost involved in leasing is likely the better option.

The above is in part a summary of an article titled “Leasing-Get ’Em While They’re Hot” taken from the May/June 2010 issue of WERCSheet (the Warehousing Education and Research Council). You can download the complete article at www.werc.org.

Final Thoughts

Depending on where you need space, now is without a doubt a good time to negotiate a leasing agreement. However, ProLogis predicts that market rents will begin to rise by late 2010 or early 2011. The report predicts that when rents do go up, the run-up could turn out to be just as precipitous as the rent fall-off was during the downturn.

Also, companies should be aware of building height restrictions which vary based on local fire codes. Most of today’s “Spec” buildings are equipped with ESFR sprinkler systems. In some locations the maximum clear height will accommodate 6 pallets, while other locations will allow 8 pallets high. This may be an important factor where high density narrow aisle or vary narrow aisle storage is being considered.

Agree or disagree with Holste's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

You can also contact Holste directly to discuss your material handling or distribution challenges at the Feedback button below.