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Industrial property market recovery seen for 2011, following exports, manufacturing

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LOS ANGELES -- After one of the worst years in decades, the industrial property market is slowly regaining its footing.

Companies are beginning to stock up on goods again after holding back the last two years during the recession.

Exports are up and manufacturing activity jumped last month to the fastest pace in more than five years.

That's helped re-ignite demand for warehouse and manufacturing space, particularly around major seaports and other trade hubs.

Companies such as The Procter & Gamble Co., Williams-Sonoma Inc. and Kraft Foods Inc., have signed new leases in recent months for industrial properties.

The trend is a good sign for the economy, because it signals executives are more optimistic about their business prospects. And when companies expand, they often increase hiring.

The pickup in leasing activity, which started in late summer, should begin to reduce the industrial vacancy rate and stem rent declines by early next year, experts say.

Major cargo hubs like Los Angeles, Seattle, Kansas City, Houston and Dallas are expected to bounce out of the slump faster than other markets.

While Phoenix, Chicago and Detroit are among the cities projected to lag.

"The worst has passed," said Craig Meyer, a managing director for Jones Lang LaSalle (NYSE: JLL) in El Segundo, Calif. "We're clearly at the bottom looking up."

The U.S. vacancy rate for industrial properties hit 10.3 percent at the end of last year, according to the real estate services company.

Other firms, such as Grubb & Ellis (NYSE: GBE), peg it slightly higher at 10.7 percent.

While that's the highest level in decades, new deals are happening in cities like Los Angeles, Houston, Philadelphia and Oakland, Calif.

Last month, Aaron Metals Co., bought a 100,376 square-foot building near Oakland for about $4.5 million.

The company, which recycles metals, initially looked into buying more space back in 2007. Then its sales took a hit as the economy tanked.

Now commodity prices are rising and things are looking up.

"Fortunately, we were able to survive and we still need the space," said Jesykah Forkash, facility manager.

The glut of industrial property has forced many landlords to lower rents in order to court tenants.

The average rent for industrial space fell about 7 percent in the last three months of 2009 compared to the prior-year period, but was off just 2 percent from the third quarter, according to Jones Lang LaSalle.

In the South Bay region around the ports of Los Angeles and Long Beach, sales and leasing activity for industrial properties began rising last summer and are now running at about double compared with a year ago, said Chuck Littell, associate vice president of Colliers International in Torrance, Calif.

"The companies that have survived are much more confident about expanding," Littell said. "Some of them feel urgency about taking advantage of today's prices."

But so far, that hasn't whittled down the vacancy rate, which is at 5.6 percent, up from 4.3 percent a year ago.

Still, Littell notes the vacancy rate is well below the national average and expects it should begin to flatten late this year.

A surge in port traffic could help.

Nationally, U.S. ports have seen container cargo volume drop by 15 percent since 2007, but cargo shipments started climbing this year, according to a report by Colliers.

At the neighboring ports of Los Angeles and Long Beach, which together handle about 40 percent of the nation's cargo container shipments, cargo volume posted a 28 percent annual increase in February.

Developers like Highland Fairview are banking that growing trade will fuel demand for industrial space in Southern California.

The company, a Trump Group firm, broke ground last month on an industrial hub about 72 miles east of Los Angeles.

The initial phase will encompass 2.6 million square feet, most of which has been leased to Skechers USA Inc. (NYSE: SKX) The sneaker maker is consolidating operations from five facilities.

The project is expected to create 1,100 construction jobs and, once completed, house more than 3,000 employees, said Iddo Benzeevi, Highland's chief executive.

"You now see a trend in the marketplace where big companies are consolidating their logistics operations," Benzeevi said. "The diversity of industries we have here is what continues to drive the demand for this kind of space."

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