Fragile Recovery Not Holding Back Industrial & Logistics
Initial unemployment claims continue to fall, suggesting the U.S. economic recovery remains on track to produce strong GDP growth in Q3. Yet a sense of fragility is emerging. Consumer confidence dropped to a six-year low in August. The failure by Congress so far to agree on a new and much-needed stimulus package is one part of the problem. The increasing possibility that corporate America will start to retrench, cutting well-paid middle-class jobs, is another.
There are some notable strengths, however. Existing home sales have returned to a level not seen since the peak of the 2006 housing boom. A ramp-up in construction will surely follow. Retail sales are already above their pre-COVID level and likely will be boosted further by the buoyant housing market. Durable-goods orders rose by 11.2% in July—the third consecutive monthly gain. The Fed’s decision this week to go easy on inflation in the coming years is a very welcome policy development as well. These factors are highly positive for industrial & logistics real estate. And with e-commerce’s share of total retail sales growing by 16% to 20% over the past six months—as much as in the past four years—the I&L sector is poised to further withstand the crisis. Spotlight on Industrial & Logistics
Distribution Space Needed
The U.S. industrial & logistics market posted its 41st consecutive quarter of positive absorption in Q2 2020, with record-high asking rents and an overall vacancy rate of 4.7%—just 40 basis points higher than the all-time low. Transaction levels suggest net absorption will remain positive throughout this economic downturn, unlike the Global Financial Crisis when there were six consecutive quarters of negative net absorption. Approximately 314 million sq. ft. of new industrial space is under construction nationwide, 37% of it preleased. Urban land sites for industrial development are scarce, leading developers to get creative by converting vacant retail sites to distribution facilities. As of July, there were 59 of these conversion projects either completed or underway.
E-commerce growth and higher inventories onshore will require more than 2 billion sq. ft. of additional warehouse/distribution space over the next decade. Because of import tariffs and COVID-related slowdowns, many companies are adopting a “China-Plus-One” supply chain strategy—sourcing goods from other lower-cost export countries. While this shift will affect site selection, it is the volume of consumption that will dictate demand for industrial real estate.