Structural Tailwinds Support Industrial Sector As Strong Dollar Boosts Imports and Ecommerce Drives Local Demand
Consumption headwinds beginning to abate. Broadening economic growth is providing momentum to the industrial property sector, lowering vacancy rates across most metros and supporting strong rent growth. The headwinds that emerged over the winter months have largely dissipated, with a few notable exceptions. The now-resolved West Coast port labor disputes hampered international trade, while harsh weather in the Northeast restrained consumption. Concurrently, the strength of the dollar raised the cost of U.S. goods internationally and softened domestic demand for American-made products as consumers favored the relative affordability of imports. Going forward, these challenges are expected to fade as global currencies rally and the U.S. labor market picks up steam. Taken collectively, some hurdles still face the world’s largest economy, but they are far outweighed by positive indicators and only serve as fodder for a dovish Federal Open Market Committee to maintain an accommodative fiscal policy. The strengthening of both the producer and consumer economies should bolster demand across a wide swath of industrial facilities. Total jobs now stand 3.5 million higher than prior to the recession; wage growth has begun to gain traction; and retail sales appear poised for greater acceleration. Furthermore, corporate profits have been robust, and unemployment has continuously tightened.
Net absorption of industrial spaces has steadily improved. Demand for bulk industrial space often recovers first, leaving slack in the small and midsize markets. Internet businesses and retailers are a segment that will reshape the industrial sector in the coming year as businesses compete on speed of delivery, forcing retailers to find warehouse locations proximate to major population centers. Demand for space has also grown as auto and housing sales have escalated. After reaching a trough in early 2009, auto sales are consistently rising as consumers replace older vehicles. The housing market has also demonstrated upward momentum, raising demand for a wide range of housing-related industrial tenants. Combined, these trends will boost local industrial demand, drive investor activity and attract capital. The bull market has begun rippling beyond major port hubs and distribution markets to encompass a broader swath of metros.