Economic data related to the U.S. industrial real estate market are pointing in a positive direction. The national availability rate was essentially unchanged in Q1 2017, even in the face of increased supply.
CBRE Econometric Advisors estimates that about 45 million sq. ft. of industrial space was completed in Q1, which is the highest first-quarter level since 20081.The surge in construction is welcome given broad-based tenant demand, which is being supported by a number of positive economic drivers. 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.
- 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. One note of caution is the softer import volume of auto parts; this could hurt leasing activity in certain Midwest and Southern industrial markets if auto sales continue to weaken as they did in March.
- Factory orders: 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.
- ISM Purchasing Managers Index: The ISM Index reflects the optimistic sentiment that has spread throughout the industrial economy in recent months. In Q1 2017, this survey-based measure registered the best first-quarter average 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.
1Q1 2017 completions and availability rate figures are compiled by CBRE Econometric Advisors. Data are preliminary and subject to revision as more data are collected.
- 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, has 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.