While the industrial market is not a crystal ball, it typically is the first commercial real estate sector to rebound from a recession. And, according to Cushman & Wakefield, Inc.’s Jim Dieter, SIOR, executive vice president, Industrial Brokerage, U.S., national trends heading into the second half of 2010 provide reason for cautious optimism about what the future holds across product sectors and the economy in general.
“The industrial market is showing positive signs, both ‘on paper’ and in market fundamentals,” Dieter said. “While overall vacancy continued to climb during the first months of 2010 – resting at just under 11 percent at the end of the first quarter – 60 percent of the markets tracked by Cushman & Wakefield reported an increase in year-over-year leasing activity. Nationally, leasing activity increased 10 percent, to 60.5 million square feet, over the same period last year.”
Dieter added that, in early 2010, construction completions reached their lowest point since Cushman & Wakefield started tracking. A lack of new product coming online and the expected continuation of steady leasing through the coming months should boost absorption numbers.
Positive trends in manufacturing and inventories suggest that the industrial recovery will continue to gain momentum, according to Dieter. “The Institute of Supply Management’s Manufacturing Index, which serves as the benchmark on how the country tracks manufacturing performance, is coming into 10 straight months of improvement,” he said. “We also are seeing that the universal ‘destocking’ – or inventory reduction – that has taken place among major companies through the down cycle is beginning to end.”
Growing inventories usually translate to new and increased demand for distribution space. They bolster manufacturing and also benefit railroads and overseas shipping, which move the new inventory product across continents and states, Dieter explained.
“Ultimately, a ‘restocking’ trend can benefit many aspects of the industrial landscape,” he said. “Corporate earnings have and will continue to improve in the immediate future. As such, it is fair to assume a gradual increase in inventories is expected, though generally the inventory-to-sales ratio may decline in the mid-term.”
Dieter added that other positive signs for the industrial market include reported growth in retail, auto and housing sales – all of which connect deeply with inventories and demand for distribution space.
“Looking at the industrial landscape and all the components that go into it, I believe there is reason to remain cautious but also regain a positive outlook about the economy for the balance of 2010 and going into 2011,” he said.
MARKETS AND TRENDS TO WATCH:
Dieter noted that some of the more active markets during the first months of 2010 included Atlanta, Inland Empire and the PA I-81/I-78 industrial corridor.
“When global trade recovers, East Coast ports will be best positioned for increased TEU – or twenty-foot equivalent units – activity,” he noted. “Additionally, the widening of The Panama Canal will benefit both the eastern seaboard port markets, as well as inland hubs such as Columbus, Ohio.
“The southeast region of the U.S. is seeing increased manufacturing jobs due to fuel price uncertainty, a general pull back from China and possibly Mexico’s lack of stability,” he added. “Near sourcing will continue to be the trend in the decision-making process for plant locations.”
Today’s core markets share some general characteristics, according to Dieter. They include the presence of intermodal hubs, stable supply and demand factors, liquidity, diversification, and market depth. Also, they generally feature superior infrastructure with international airports and container ports both seaport and inland. For the smaller regional distribution markets, being closer to the consumer and minimizing transportation costs bode well, especially as oil prices increase.
Globalization and how the global economy is interconnected present key difference today, as compared to prior recessions. “Rail and intermodal markets will have bright futures when global trade reaches full stride,” Dieter said. “The rise of rail to distribute product to and through inland ports will be evident over the coming years. Additionally, the intermodal ‘break even’ point will decrease from about 800 or 900 miles to about 600.”
The improved linkage between Hampton Roads, Va. – one of the best deep water ports on the East Coast – and Columbus, Ohio – a well-positioned inland hub – provides a major capacity improvement project in terms of moving freight in the United States, Dieter noted.
Additionally, the ports in Baltimore, Philadelphia, Charleston, Savannah, Jacksonville, and Norfolk all are dredging and building additional crane capacity to coincide with the widening of the Panama Canal. “Many Eastern ports today do not have the channel depth to handle the imminent 12,000 TEU vessels,” Dieter said. “This will be critical moving forward.”