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Industrial Real Estate Indicators Generally Positive at Midyear

Good News in the Areas of Consumption, Production, Freight Movement, and Housing Starts
July 15, 2013
By: Shaw Lupton, Senior Real Estate Economist

Leading indicators for the industrial real estate sector paint a generally positive view for the near term. While still leaving much to be desired, they affirm PPR’s view that U.S. industrial real estate will continue to make gradual gains in 2013.


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The good news this past quarter came in the areas of consumption, production, freight movement and housing starts, but the economy still has a way to go before it is running on all cylinders in terms of business confidence, trade, and homebuilding (see Exhibit 1).

Goods consumption continues its ascent to ever-greater heights, hitting a new record that is, in real terms, 12.1% above its 2005-2007 average. Household re-leveraging and the release of pent-up demand for durable goods have helped fuel rising consumption despite weak income growth. The continued shift to online purchasing has put a strain on retail demand but nevertheless is generating more industrial demand. Last year alone Amazon.com grew its North American distribution presence by about 8.5 million square feet.

The ISM Purchasing Managers’ Index, at 50.7, reflects weak near-term business expectations despite positive indicators across much of the rest of the board. Likely culprits include sluggish income growth and slowing U.S. exports, and slowing economic growth and heightened geopolitical uncertainty globally. This is a discouraging trend, since businesses ultimately sign leases!

Industrial production has risen to 1.1% above its 2004-2007 average. While we do not see manufacturing as a major jobs-driver due to continuously rising productivity, the industrial market will still benefit from increased manufacturing output.

Port traffic at LA/Long Beach (about 36% of U.S. port traffic, per Zepol data) was up by 1.3% year-over-year, yet it remains 3.1% below its pre-recessionary average. Importantly for warehouse demand, containerized imports were up by 5.3% in the past year. Imports through the ports of LA/Long Beach support absorption in modern logistics space on the West Coast and in major rail-linked distribution hubs like Chicago and Dallas.

The rise in truck tonnage, which is highly reflective of the overall health of local economies across the country, coincides with a continued firming of small-bay warehouse demand. Truck tonnage in the U.S. is up by 3.8% year-over-year and about 8.3% above its pre-recessionary average.

Housing starts, a key ingredient missing from the early innings of the economic recovery, have made major strides in the past 12 months, rising by 13.1% to reach an annualized rate of about 900,000. Small-bay industrial owners are likely to benefit most from this trend. However, don’t get too excited as housing starts are still 51% below their 2005-2007 average.

PPR will continue to monitor these leading industrial indicators closely for signals that may affect its near-term forecast views.

Shaw Lupton is a senior real estate economist for CoStar Group







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