6C — May 29 - June 11, 2015 — Industrial / Distribution Centers — M id A tlantic First Quarter 20 5 Report
Real Estate Journal
www.marejournal.com
I ndustrial R eal E state & D istribution C enters Strong Economy Expected to Increase Industrial Demand in 2015, Return to Normal Growth in 2016 The U.S. economy showed accelerating growth through the end of 2014, with robust indications of strength for 2015. An analysis of 2014 data by Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, University of Central Florida, indicates that, not surprisingly, the national industrial market absorbed approximately 224 million square feet (net), with asking rents steadily rising in each quarter of 2014. GDP moved into strong positive territory, with a 5.0 percent rate of annualized growth in the third quarter and employment continued to surge through the end of the year. These factors are likely to continue their strong performance throughout 2015, especially given the still low interest rate envir nment, and are thus likely to produce strong net demand for industrial real estate in 2015. NAIOP Research Foundation Net demand for industrial space shows no sign of letting up “We are forecasting a net occupancy gain of 242 million square feet of industrial space by the end of 2015 or approximately 60.5 million square feet per quarter,” said Harris. “We still expect the first half of the year to be slightly more robust than the second half, as pent up demand is satisfied and the economy starts to temper. This trend should likely persist throughout 2016, when our absorption forecast moderates to a net gain of 206 million square feet. Assuming that economic productivity and employment gains persist, we find it highly likely that interest rates will rise by the end of the year and throughout 2016. This will help level economic growth and control inflation.”
report released by the NAIOPResearch Foun- dation says that net de- mand for industrial space could reach 242 million s/f in 2015, thanks to the U.S. economy’s accelerated growth through the end of 2014 and its robust indications of strength for 2015. Report Highlights Include: 2015 quarterly net absorption will average 60.5 million s/f. 2014 industrial net absorp- tion reached a near-record 224 million s/f – an 8% increase over 2014. Asking rental rates steadily elevated in each quarter of A The consumer segment of the economy is looking healthier than it has since 2007, before the Great Recession. Retail spending has set new record highs almost every month, unemployment has hovered around the near full employment level of 5.6 percent as of December 2014, and there even appear to have been some gains in real wages in industries such as leisure and hospitality and information. Further, the recent decline in oil and gasoline prices offers a great form of stimulus to many lower- and middle-income families that will no doubt translate into increased consumer productivity. Guirguis and Harris thus expect a great deal of th demand for industrial space to come from firms that produce and distribute consumer goods, including the automotive sector, which has grown considerably (auto sales are up 6.03 percent in 2014) and is almost fully recovered from the recession.
2014. The report says that the con- sumer segment of the economy is looking healthier than it has since 2007, before the Great Recession. Retail spending has set new record highs almost ev- ery month, unemployment has hovered around the near full employment level of 5.6% as of December 2014, and there even appears to have been some gains in real wages in industries such as leisure and hospitality and information. Further, the recent decline in oil and gasoline prices offers a great form of stimulus to many lower- and middle-
income families that will no doubt translate into increased consumer productivity. “We expect the first half of 2015 to be slightly more robust than the second half, as pent up demand is satisfied and the economy starts to temper. This trend should likely persist throughout 2016, when our absorption forecast moderates to a net gain of 206 million s/f,” said Dr. Joshua Harris, University of Central Florida and a NAIOP Distinguished Fellow and study co-author, along with Dr. Hany Guirguis, Manhattan College. “A great deal of the demand for industrial space to come from firms that produce and distribute consumer goods, and that’s why commercial real estate is seeing such a boom in e-commerce fulfillment and distribution facilities,” said Thomas Bisacquino , NAIOP president and CEO. “Another leading sector is automotive, which has grown considerably (auto sales are up 6.03% in 2014 and is strongly recovering from the recession).” Guirguis andHarris note one gloomy sector of industrial de- mand will likely be oil and gas producers and their servicers, contractors and suppliers. The fall of oil prices to below $50 per barrel is assuredly going to translate into reduced oil exploration activities in the U.S. and elsewhere as supply outshoots demand. On net, the authors believe losses in space due to energy price weaknesses will be more than made up by gains in consumer-serving industry demand, but regional differences are nonetheless likely to occur. About the Report The predictive model, updat- ed and released semi-annually, is funded by the NAIOP Re- search Foundation. The fore- cast is based on a process that involved testing more than 40 economic and real estate vari- ables that theoretically relate to demand for industrial space, including varying measures of employment, GDP, exports and imports, and air, rail and shipping data. Leading indica- tors that factor heavily into the model include the Fed- eral Reserve Board’s Index of Manufacturing Output (IMO), the Purchasing Managers In- dex (PMI) from the Institute of Supply Management (ISM), and net absorption data from CBREEconometric Advisors. n
TABLE 1 The NAIOP Industrial Space Demand Forecast U.S. Markets, Quarterly Net Absorption
First Quarter 2015
Forecast Square Feet
70
64.7
61.4
58.9
60
56.7
54.9
52.3
50.3
48.5
50
40
30
20
10
0
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
The one gloomy sector of industrial demand will likely be oil and gas producers and their servicers, contractors and suppliers. The fall of oil prices to below $50 per barrel is assuredly going to translate into reduced oil exploration activities in the U.S. and elsewhere as supply outshoots demand. On net, Guirguis and Harris believe losses in space due to energy price weaknesses will be more than made up by gains in consumer-serving industry demand, but regional differences are nonetheless likely to occur. Oil prices are very hard to predict. Guirguis and Harris therefore identify this as the greatest source of uncertainty for their 2015 industrial demand forecasts.
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