The Commercial Real Estate Development Association (NAIOP) Research Foundation recently released the Industrial Space Demand Forecast for the third quarter of 2019. The model was developed by Dr. Hany Guirguis of Manhattan College and Dr. Randy Anderson, formerly of
The University of Central Florida. The predictive model forecasts demand in the industrial real estate space at a national level. The study tests more than 40 economic and real estate variables which are all linked to demand for industrial space: GDP, exports and imports, and air, rail, and shipping data. There are other leading factors that heavily influence the model including “Federal Reserve Board’s Index of Manufacturing Output (IMO), the Purchasing Managers Index (PMI) from the Institute of Supply Management (ISM) and net absorption data from CBRE Econometric Advisors.” All of these indicators are used to determine the current real estate demand growth through the study of peaks and declines.
The main takeaway from the 2019 3rd quarter demand forecast is that the net industrial space demand has decreased due to the slower growth in the United States economy. During the first half of 2019 many global events impacted the economy including but not limited to the government shutdown and higher tariffs and trade disagreements between the US, China, and Mexico.
Here are the key statistics from the demand forecast:
- In 2019 and 2020, the industrial space demand is estimated to be 37 million square feet per quarter. However, in 2017 and 2018, the average demand per quarter was 60 million square feet- this decline clearly indicates a significant decrease in net absorption for the years to come.
- In 2017 and 2018, the average quarterly completion was 54 million square feet whereas the average quarterly completion fell to 42 million square feet in the first half of 2019.
- In the first quarter of 2019, GDP growth rate was 3.1% and in the second-quarter GDP growth fell to 2.1%.
One reason the forecast predicted a slowdown is because GDP growth has decreased. The estimated GDP growth for 2019 is between 2.5-3.0%, however this has since changed to a more accurate range of annual GDP growth of 1.75-2.25%. This is a significant decrease and will directly impact the industrial space demand. A slowdown in business investment results in lower GDP growth rates.
Another reason for the decrease in industrial demand is because the number of net completions with these projects is growing at a slower pace. It is important to note that even with the slower pace, the supply and demand should stay balanced for the industrial sector. This means rents and vacancy rates should stay consistent and not fluctuate in various markets across the country.
Based on these statistics, it is clear that a general slowdown is on the rise and a recession could occur sometime in the distant future. On a positive note, if there is a resolution to the trade talks, expansion plans could continue as originally planned since industrial enterprises may be more confident with the economy and environment. Another factor that could increase the industrial demand forecast is Amazon’s expansion to one-day delivery. This would allow more leasing opportunities for last-mile distribution centers. There are many factors to consider but hopefully the US economy grows stronger and the demand for industrial space increases in the 4th quarter forecast.