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Industrial market shows strength but faces challenges

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Stronger leasing activity in the first half of 2010 provided some optimism that the local industrial-space market is recovering from a down year in 2009. But brokers remain cautious about how the year will come in thanks to several big lease expirations that will dump space on the market in the second half.

About 2.5 million square feet of industrial space is expected to hit the market between now and the end of the year, according to mid-year reports from CB Richard Ellis, Summit Realty Group and NAI Olympia Partners. Most of that is due to companies vacating space in Plainfield in the region’s southwest submarket.

The return of large spaces to the market because of companies vacating space is relatively new here, Jeremy G. Woods, a Summit executive vice president specializing in the industrial market, said in the report. Previously, new space built on spec was what typically put upward pressure on vacancies.

The biggest loss for the market is John Deere, which is vacating 925,000 square feet at 800 Perry Road in Plainfield. The space is being offered for sublease by CB Richard Ellis until Deere’s lease expires in September 2012. Deere reorganized its supply chain and is now using several smaller distribution centers around the country.

Other tenants vacating space moved or consolidated within the Indianapolis market. Cantrell Logistics, for example, moved from Park 100 to Mount Comfort Commercial Park in Greenfield.

Fastenal left one location in the northwest submarket but expanded its facility on Guion Road by adding a new warehouse and automated retrieval system.

The moves are driven in large part by companies under pressure to control costs or downsize that are taking advantage of the fact it’s still a tenant’s market, said Mark Writt, a senior vice president of CB Richard Ellis who focuses on the industrial market.   

“Tenants are able to relocate into better quality facilities at competitive lease rates and improve their efficiency and their occupancy costs,” Writt said.

With an industrial vacancy rate between 9.5 percent and 10.7 percent depending on who’s doing the counting, the market here remains in attractive shape compared with that of other cities, where vacancy rates exceeding 15 percent aren’t uncommon.

The relatively healthy occupancy levels can work against landlords here in one respect. Writt said logistics companies that are trying to get rid of overcapacity might be more likely to vacate space here, where they think they’ll have a better chance of subleasing it.

The large number of pending vacancies means that to avoid losing ground the market will have to sustain the growth in leasing activity that has happened so far this year.

NAI Olympia Partners, whose report dealt strictly with bulk warehouse space, said more than 3.8 million square feet of bulk warehouse deals were completed through the first half of the year, compared with 2 million square feet for all of 2009.

Among the biggest deals: Case New Holland’s renewal of its 1.1-million-square-foot lease in Lebanon and Johnson & Johnson’s purchase of 115 acres for a 1.1 million-square-foot warehouse in Plainfield.
 

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