NAIOP Industrial Demand Forecast, Third Quarter 2018 Report
The forecast for demand for industrial space has risen because of increased expectations of broad macroeconomic growth and job generation for the remainder of 2018 and 2019, says the NAIOP Industrial Demand Forecast Third Quarter 2018 Report.
According to report authors Dr. Hany Guirguis of Manhattan College and Dr. Joshua Harris of New York University, quarterly net absorption is expected to increase to an average of 60 million square feet for the latter half of 2018 and then moderate to 56 million square feet per quarter in 2019.
Advance indications for gross domestic product (GDP) growth for the rest of 2018 show consensus forecasts approaching annualized growth of 4.0 percent for the second quarter, which could result in sustained growth of 3.0 percent or more for the rest of the year and into 2019. Higher oil prices are a leading cause of increased business investment because as oil prices rise, there is more incentive to increase energy production and commence energy exploration – activities that significantly stimulate the overall economy. Another major force at play is consumer spending, as e-commerce continues to generate demand for industrial space.
In 2017 quarterly completions averaged 54 million square feet, which closely matched expected and actual demand, but just 45 million square feet per quarter have been delivered to date in 2018. This gap contributed to the vacancy rate falling to 7.2 percent at the end of 2018’s second quarter from 7.4 percent at the end of 2017. Without increased construction of industrial space, market fundamentals such as rents and occupancy rates will only rise on the basis of demand predictions for the rest of 2018 and all of 2019.
The vast majority of economic indicators are showing positive growth and indicating such growth should continue for at least the next year and a half, if not longer. Indicators with a clear predictive link to industrial space demand are also very strong; the Institute for Supply Management’s Purchasing Managers Index continues to improve, with a reading of 60.2 as of June 2018 (any reading above 50 indicates growth or positive expectations). Additionally, most subcomponents of the Index are in positive growth territory as well.
As such, the industrial market should see continued growth from retail sales that are linked to e-commerce distribution, but also from increased manufacturing activity, including production of large durable goods and small goods as well as assembly of packaged food items. According to the Institute for Supply Management, the overall manufacturing sector has grown for 22 months, registering one of the longest sustained growth periods for some time in the U.S. Growth in this area benefits light manufacturing, assembly and even large-scale factories, and it also supports other components of the manufacturing supply chain such as warehouses and transport.
The biggest risk to the economy and the industrial real estate sector remains the threat of rising interest rates. At this writing, the yield curve (the difference between long-term and short-term U.S. Treasury rates) has been flattening as the Board of Governors of the Federal Reserve System adjusts its short-term interest rate policy. So far, there has been no inversion where short-term yields are higher than long-term yields, yet risks relating to increases in short-term interest rates are palpable because the economy has been in expansion for more than nine years. Eventually, the U.S. will experience some form of a contraction, but at this moment, it appears to be more than two years away.
For key inputs and disclaimers, and the methodology behind the forecast, visit the NAIOP Industrial Space Demand Forecast, Third Quarter 2018 Report.
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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 19,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit naiop.org.
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