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Demand for Industrial Space Will Remain Robust

NAIOP Industrial Space Demand 3Q Report Released

August 31, 2017

After a slow start in the first quarter of 2017, the U.S. economy appears to be back in expansion mode with GDP growing at an annualized rate of 2.6 percent in the second quarter, according to the NAIOP Industrial Space Demand Forecast Q3 2017. Job creation has averaged about 195,000 net new jobs per month throughout this year and unemployment has settled near all-time lows at 4.3 percent as of July 2017.

Download the full report here.

The model, run quarterly by Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, New York University, suggests that net absorption of industrial space could increase slightly over the forecast released six months ago to 66 million square feet per quarter for the second half of 2017 and to roughly 60 million square feet per quarter in 2018.

According to the model, the potential for a slowdown in net absorption due to a stall in macroeconomic activity is now pushed into 2019 at the earliest; however, this is open to further outward revision if the economy continues to grow at a pace above the current forecast. Given the uncertainty regarding policy changes in Washington, all forecasts for economic activity, and even industrial space demand, deserve a special caveat. Right now, the broad markets — measured by proxy through stock prices and consumer and CEO confidence — are quite positive about future expectations relating to regulatory and possibly tax reform. If those positive expectations change, the economy could cool off suddenly and thus demand for industrial space could decline.

At this point, it appears the first quarter was an anomaly relative to both GDP and employment growth due to the unexpected presidential election of Donald Trump. The election result caught many market participants off guard and thus it appears that decisions about investments and expansions were delayed temporarily. Overall, market consensus seems to be that the latter half of 2017 may benefit from a release of pent-up demand. The debate about peak pricing in commercial real estate will only continue; however, space market fundamentals, especially in the industrial market, are only likely to improve as the overall economy expands. Rising construction prices and labor shortages will likely moderate generation of new supply, even with rising economic growth, but will likely help rental rates and pricing continue to increase.

While the future of the economy and the effectiveness of the current U.S. President are likely to remain open for debate, there is little question that demand for industrial real estate will remain strong. While stories about the “death of retail” are assuredly overblown — with REIS reporting recent quarters of positive net absorption of retail space and the U.S. Census Bureau posting all-time record highs in retail sales — it is increasingly clear that more physical goods will pass through multiple distribution warehouses before reaching consumers’ hands.

Further, based on data supplied by the Institute for Supply Management showing that new orders are growing and on U.S. Census Bureau data illustrating that orders for durable goods are rising, manufacturing activity still appears to be increasing steadily in the U.S. as of the second quarter of 2017; while this activity will require fewer jobs due to automation, it will still require more industrial facilities, further underpinning demand for industrial real estate.

See information on actual vs. forecast and the methodology behind the report on the Industrial Space Demand website.

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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