Industrial rentals in the red

12-03-2010

The effects of softer economic activity on the demand for industrial space to rent, and consequently market rentals, are becoming strikingly evident.

Fading demand for industrial space is implied in the corresponding graph. Evident from the graph is how industrial vacancies generally moved north in all of the major industrial conurbations. As in the fourth quarter of 2009, vacancies stood at between 2,1 and 3,6 on the Rode scale of 0 to 9. This equates to percentage vacancies of roughly between 3,8% and 8,6%.

In the light of rising vacancies, it comes as no surprise that the growth in market rentals has come under downward pressure. In fact, in the fourth quarter of 2009, prime industrial rentals in all of the major industrial conurbations were lower than they were a year ago. In the Central Witwatersrand, market rentals were down by roughly 3%, as well as in Durban (-8%); Port Elizabeth (-7%) and the Cape Peninsula (-1).

Some good news for the industrial property market, however, has been manufacturing activity, which ended 2009 on a positive note. The growth in the physical volume of production has been accelerating since the latter half of 2009, bringing along improvements in the utilization of production capacity. As the graph that follows shows, there is a strong relationship between the underutilization of production capacity (owing to insufficient demand) and industrial property vacancies. This attests to the robust influence that changing demand conditions — in the manufacturing industry — have on industrial vacancies, and consequently, on the growth in industrial market rentals.