The U.S. warehouse market contracted during the third quarter of 2008, posting a slight drop in occupied space and a sizeable increase in vacancy, according to Colliers International. This ongoing notable weakness suggests that the industrial real estate market will continue to be impacted by recessionary conditions.

A combination of weak demand and rising completions pushed the Q3 vacancy rate up 27 basis points to register 8.71 percent. Market polling results showed that 42 markets surveyed by Colliers posted a rise in vacancy, while 14 markets posted a decline.

In terms of new supply, 41.6 million square feet (msf) was completed during the July through September period - down from the 43.9 msf injected during Q2. Year-ago third quarter completions came in at 44.9 msf.

Industrial developments under construction dropped noticeably during the third quarter, registering 107.1 msf of space. This compares with 124.4 msf at the end of the second quarter and 153.5 msf for the year-ago quarter.

Absorption remained negative during Q3 2008. Occupied space contracted by 0.4 msf. This, however, is an improvement from the negative 9.8 msf recorded in Q2. For the same period last year, absorption measured 36.1 msf.

The debilitated industrial market comes as little surprise in light of the slide in many demand drivers - highlighted by the September ISM manufacturing index, which registered 43.5 (well below the psychological "50" level), suggesting the manufacturing sector is currently undergoing a significant contraction. In addition, construction, housing, the auto sector and the retail sector all continue to battle strong downward pressure.

"The warehouse leasing market keeps struggling in the face of a rapidly-slowing economy," remarked Ross Moore, executive vice president and director of market & economic research at Colliers International. "Manufacturing, and in particular the auto sector, were key sources of weakness -- with output dropping dramatically over the past few months. Exports remain a bright spot; however, this is sure to change with the increasing possibility of a global recession and the expected decline in demand for products destined for ex-U.S. markets. In addition, retailers have been paring inventories, and this serves as yet another drag on the warehouse market. Colliers predicts industrial leasing conditions will remain sluggish through at least the midpoint of 2009."

Rents for industrial space were marginally lower during the third quarter, with a 0.7 percent decrease, bringing the national average to $5.59 per square foot (psf). This leaves us virtually unchanged from the year-ago period, with rents dropping just $0.01 psf.