NAIOP's Research Foundation forecasts the demand for industrial space will grow at an annual rate of 1.7 percent, based on first quarter data.

The forecast shows the industrial market is picking up, though observers both nationally and regionally remains cautious.

The foundation released the national space demand forecast this week, using a new model to predict future demand based on various economic factors and net absorption data. The quarterly forecast is based on data from the Institute of Supply Management and the Federal Reserve, and net absorption data from CBRE Econometric Advisors.

The annualized rate of growth in the fourth quarter is more than 1.2 percent, which is in line with the historical average of 1 to 2 percent. Before the third quarter of 2010, demand for industrial space was contracting. The market had seven straight quarters of negative demand.

The two main variables used in the calculation — Purchasing Manager Index and Index of Manufacturing Output — are strong and suggest positive increases in demand during the next several quarters, according to the foundation.

Two of the demand drivers — PMI-Employment and PMI-Inventory — range from average to strong, but they are trending down from previous quarters. This suggests the industrial market is unlikely to expand much until the overall economy becomes more robust.

The good news for industrial landlords is that other demand drivers — PMI-New Orders, PMI-Production and PMI-Deliveries — now range from average to strong, and are trending up, suggesting increasing demand for industrial space.

In the Puget Sound region, the number of investment sales began picking up late last year. Six sales closed in December and there were seven in the fourth quarter, bringing to 10 the number of investment deals over $10 million in 2010, according to local brokerage Pacific Real Estate Partners.

The local leasing market also continues to show signs of life with some expansions. TMX Aerospace grew by 70,000 square feet and Exotic Metals grew by 48,000 square feet, according to Pacific Real Estate Partners and Colliers International.

“Economic optimism is spreading and impediments to economic recovery are clearing for businesses in the Puget Sound region,” states Colliers' fourth quarter report, which noted Washington state added 2,100 jobs in December.

About 1,400 of those jobs were in manufacturing. “The Puget Sound industrial market is in prime position to continue recovering, evidenced by tenants who are new to the region,” the report states.

But PREP saw a drop in industrial activity as users renewed leases or signed deals for new leases during the fourth quarter. The number of large blocks of space available began to increase, though brokers said they have seen a pickup in activity among users.

The South King County market ended the year with a negative absorption of more than 786,000 square feet, according to PREP. While not a good performance, it was much better than 2009 when the absorption rate was a negative 4 million square feet. Pierce County fared a little better with positive absorption of more than 176,000 square feet for 2010.