Recent Economic Indicators Bode Well for Industrial Real Estate

by | 17 October 2019

Recently released economic indicators for the month of September were mostly positive and diminish a potential economic slowdown headwind for at least the next few quarters. The U.S. economy continues to add jobs, although not at the pace of 2018. Job growth slowed a bit in September, with 136,000 new jobs added to the U.S. economy, compared to 168,000 positions created in August, according to the latest jobs report from the Bureau of Labor Statistics. Year-to-date through September, monthly job growth averaged 161,000 jobs, much lower than the 223,000 averaged at the same time in 2018. The decline in job growth is a direct correlation to a drop in people looking for work, with the unemployment rate of 3.5%, the lowest since December 1969.

Job growth is a key component of consumer sentiment and thus consumer spending, which directly correlates into demand for industrial real estate. Confidence and spending also remain at net positives for industrial real estate. The University of Michigan consumer sentiment October preliminary reading came in with a score of 96.0, up 2.8% from September, and much higher than the Investing.com forecast of 92.0. The rise in consumer sentiment was backed by stronger household finances and lower interest rates. The rise in consumer sentiment is coming at the perfect time, just before the busy holiday season. The National Retail Federation is projecting an increase in sales of 3.8 to 4.2% this holiday season, in line with growth the past five years, as online sales are expected to grow significantly yet again.

While most economic indicators painted a rosy picture, there are some causes for concern. U.S. manufacturing sentiment is plummeting, with the U.S. Institute of Supply Chain Management survey sharply dropping to a rate of 47.8% in September, its lowest rating in a decade. The ISM survey sighted worries about trade as the most important reason for the decline in manufacturer’s sentiment to what’s considered negative territory (a score of 50 or higher in this survey is considered positive). Manufacturing employment also dropped, losing 2,000 positions in September. While manufacturing real estate accounts for only 10% of total existing industrial inventory, demand will be impacted for this product type if manufacturer’s sentiment remains negative. Americans are working more and more but wages are not increasing. Workers’ hourly wages dropped by a penny in September. While that might not seem like a lot, it’s worth remembering that wages should grow, not shrink, during the longest economic expansion in U.S. history.

The trade war remains the most talked about headwind for industrial real estate but according to the most recent U.S. Consumer Price Index (CPI), the increase on tariffs of Chinese imports are not impacting Americans’ pocketbooks. The U.S. CPI only increased 0.1%, compared with the previous months. While economists look for a higher percentage gain as a sign of a strong economy, prices remaining relatively flat are a good thing during a time of global trade upheaval.

At the end of the day, the American consumer will decide how much, if any, negative impact the tariffs will have on retail sales in the country, but only a drop in retail sales will create a drop in demand for warehouse distribution space. That’s not to say we are not seeing a change in distribution strategies because of concerns due to higher tariffs. When tariffs were close to being initiated, there was a large increase in imports at U.S. seaports, and thus an increase in demand for warehouse space. Now with the trade wars continuing with no end in sight, and a presidential election upcoming, many occupiers are hedging their bets and utilizing third-party logistics providers (3PLs). 3PLs are the overall top occupier of warehouse distribution space in the U.S. and their rate of leasing new space has accelerated over the past 12 months, as some retailers/wholesalers are switching to an outsourced distribution model.

Cost of transportation remains a major reason for this shift, but a safety net because of tariffs is also on the minds of retailers and wholesalers when going this route.  This is not creating a drop in industrial real estate demand, but a shift in the kinds of occupiers who are taking distribution space. Look out for our next blog in the coming days, where we release 2019 tenant activity information, and fill you in on how much market share the 3PL industry is adding in industrial real estate.

About the Author:

James Breeze is the national director of Industrial Research for Colliers International, where he focuses on analyzing industrial property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.