Economic Indicators Point Upward for Industrial Real Estate

Mike Sorohan msorohan@mba.org

April 20, 2017

The industrial sector has faced tough times over the past few years as the economy continues its shift away from manufacturing. However, recent economic data related to the U.S. industrial real estate market pointing in a positive direction, said CBRE Econometrics Advisors, Los Angeles.

CBRE reported the national availability rate was essentially unchanged in the first, even in the face of increased supply. The report estimated 45 million square feet of industrial space was completed in the first quarter, the highest first-quarter level since 2008.

"The surge in construction is welcome given broad-based tenant demand, which is being supported by a number of positive economic drivers," wrote Dave Egan, CBRE Americas Head of Industrial & Logistics Research and the report's co-author. "While there is no one surefire indicator to gauge future demand, the totality of the economic data makes us optimistic that the industrial market will remain relatively balanced in the coming quarters despite a flush construction pipeline."

CBRE cited several factors supporting a stronger industrial real estate market:

--International Trade: February's goods trade deficit declined to $64.8 billion, reversing a large increase in January that was driven by a rush of Chinese imports ahead of factory shutdowns for the Lunar New Year. "Although trade will likely be a net negative for U.S. GDP growth in Q1 2017, the wider trade deficit is a plus for the industrial market since imports generate more aggregate warehouse demand than exports," CBRE said.

--Manufacturing: Factory orders increased by 1% in February, the third straight month of growth. Inventories and shipments also continued to climb, a positive sign that warehouses will remain full in the coming months. Additionally, the Institute for Supply Management's Purchasing Managers Index showed optimism, with sentiment at its highest level since 2012. "Sentiment is ahead of the hard data in recent months, but optimism is a good sign that production and investment will gain steam this year," CBRE said.

--Retail Sales/E-commerce: Retail sales were solid in the first two months of the year, particularly for non-store retailers, who are growing sales at a 13% annual rate. Among the brick-and-mortar retailers, home furnishings and building suppliers were the growth leaders in February, underscoring the importance of housing-related purchases for retail and industrial firms.

--Consumer Spending: Real personal consumption expenditures slowed dramatically in the first two months of the year, though declines were exaggerated by an outsize drop in home energy spending caused by warmer weather. Underlying spending on furniture and other household goods have increased in the past two months, so the overall slowdown in the headline spending is not a big concern for the warehouse market.

--Consumer Sentiment: Consumer confidence, as measured in two separate surveys by the Conference Board and the University of Michigan, surged to cyclical highs in recent months, thanks to healthy wage and job growth, stock market and home price gains, and anticipation of tax cuts.

"Confidence does not necessarily lead to spending, but the willingness to purchase more is a positive sign," CBRE said.

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