Industrial Market Observations
1. Economic Landscape Dominated by Uncertainty
- Tightening financial conditions and persistently high inflation have impacted consumer purchasing power and confidence.
- Forecasts for future economic growth have been successively revised downward as the year progresses, and consensus indicates a recession is likely unavoidable.
- The Federal Reserve’s systematic interest rate increases are cooling parts of the economy, but labor markets remain tighter than anticipated.
2. Indicators Signal Industrial Demand Will Surprise to the Upside in the Short-Term
- Warehouses are still at max capacity as inventories have ballooned. Imports remain historically high, and supply chain woes have not fully evaporated. Many firms will need space to store the volume of goods still working their way through the system.
- Inflation-adjusted consumer spending on goods remains resilient, while gradually correcting down to a pre-pandemic growth trend.
- Investment in new manufacturing facilities is on the rise despite a lowered outlook for finished goods in the mid-term.
3. Leasing Market Fundamentals Remained Historically Strong in 3Q22
- Net absorption and construction deliveries were in near-equilibrium as vacancy stayed stable at the all-time low of 3.7%, with numerous markets effectively out of space.
- The construction pipeline has risen to nearly 700 million square feet. The bulk of this space will deliver over the next four quarters; lease-up performance for speculative space will vary market-to-market.
- Annual industrial rent growth posted its highest gain yet (15.1%), but rent forecast scenarios show sharply decelerating, albeit still-strong, rent growth throughout 2023.
4. Capital Markets Materially Impacted by Economic Volatility
- Investment sales volume in the third quarter of 2022 dropped 18.0% from the same period last year, while still boasting the third highest third-quarter sales volume on record.
- Dry powder has hit a record $253.3 billion, with around a third targeting industrial assets.
- Rising debt costs are placing upward pressure on cap rates with negative leverage widespread. Transaction cap rates have yet to react while REIT implied cap rates have widened sharply, driving industrial REIT values down 31% YTD. Further increases in yields are likely which will weigh on returns in both public and private markets.