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Despite Concerns, Industrial Space Demand Expected to Remain Strong

Download the full report: naiop.org/industrialdemandQ12017

March 10, 2017

Industrial Demand Q12017 Table 1

The Q1 2017 Industrial Demand Forecast calls for quarterly net absorption to average approximately 64 million square feet, a level similar to that realized in 2016. The model, run quarterly by Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, University of Central Florida, suggests that net absorption could slow to 57 million square feet per quarter in 2018 due to variation in model variables that measure GDP and unemployment. However, given uncertainty regarding federal policies and their effects on the overall economy, this figure could be revised substantially based on unforeseen events.

Download the Q1 2017 Industrial Demand Forecast and register for the NAIOP member-only webinar, NAIOP Advantage Series: What’s Next for the Dynamic Industrial Market?, on March 14. 

Overall, the consumer sector of the economy appears to be very healthy. It shows signs of steady improvement, although with some modulation in January 2017. (According to The Conference Board, consumer confidence reached a 15-year high in December 2016, but decreased slightly in January.) Hiring and wage growth remained steady from 2015 through 2016, and wealth effects from rising stock and home prices appeared to be boosting consumer spending. By pairing consumer spending with employment information, the model indicates that areas involving consumer products and e-commerce distribution are likely to remain the largest generators of demand for industrial space in 2017.

The wildcard that could cause significant growth in the U.S. economy and the industrial markets is expansion in the manufacturing and goods-producing sectors. The new Trump Administration appears to be committed to spurring growth in these fields which have in most instances, reduced production and eliminated employees since the Great Recession that took hold in 2008. This type of structural shift is not easy to predict and its impact will take time to assess. However, early indications, such as measures of business and producer confidence and future expectations included in the model, point to a higher probability of such an occurrence than at any other time since the Great Recession.

While much optimism exists among some relative to the U.S. economy, there are reasons for concern. The most palpable is the risk for higher-than-expected inflation and thus higher-than-expected interest rates. Such impacts could dampen the ability of consumers and businesses to spend and invest reducing economic activity and therefore, demand for industrial space.

The risk for such an occurrence is tempering variables in the model, resulting in a net absorption forecast for 2018 that is slightly below the forecast for 2017. In reality, U.S.-based import/export markets may see some reduction in demand, while manufacturing-based markets may see a rebound. Properties providing final or “last mile” distribution to consumers will likely see gains regardless of market location.

Finally, it is worth noting that many policy stances from global trade, taxation, hiring, regulation, health care, and so forth will likely be up for debate and could change in the coming years. Changes in any of those areas could alter some of the relationships we usually see between industrial demand and the overall U.S. economy.

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About NAIOP: NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial, retail and mixed-use real estate. NAIOP comprises 18,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit www.naiop.org.

MEDIA CONTACT:
Kathryn Hamilton
703-904-7100
hamilton@naiop.org