Industrial Space Demand Forecast, First Quarter 2020
By: Dr. Hany Guirguis, Manhattan College and Dr. Timothy Savage, New York University
U.S. Industrial Space Demand Forecast Revised Upward
In mid-2019, industrial property experts expected slower performance as demand cooled while supply caught up. At the same time,
businesses were cautious due to concerns over U.S.-China trade issues, a possible economic slowdown, and uncertainties over Britain’s
possible exit from the European Union.
However, as trade disputes dissipate and the economy remains strong, NAIOP has revised its first quarter 2020 industrial forecast upward
to early-2019 levels. According to Dr. Hany Guirguis of Manhattan College and Dr. Timothy Savage of New York University, quarterly net
absorption will remain at or above 50 million square feet on a sustained basis through Q2 2021. Demand is forecast to decrease slightly
over the next year, with net absorption estimated at 48 million square feet during the final quarter of 2021 (see Table 1).
U.S. fiscal and monetary policies continue to accommodate economic growth, and indicators suggest that the economy will remain
healthy through 2020. Long-term U.S. interest rates continue to decline, and long- and short-term interest rates have largely decoupled.
The yield curve remains relatively flat; the spread between
10-year and 3-month U.S. Treasury yields has been below 50
basis points (bps) for a year, and it was negative for nearly
a quarter in 2019. Nominal long-term interest rates in many
European countries are zero or slightly negative. Inflation in
the U.S., measured by the 10-year break-even rate, remains
nearly 50 bps below the Federal Reserve’s target of 2 percent.
Monthly job growth is robust, and the U3 measure of
unemployment remains at cycle lows. Prime-age labor force
participation continues to rise, perhaps induced by stronger
E-commerce continues to surge. According to the Federal
Reserve, e-commerce as a share of total final sales in the
U.S. has grown approximately 1 percent per year, from 4
percent in 2010 to 11 percent in 2019.
MasterCard estimates that overall U.S. holiday sales
increased 3.4 percent in 2019 relative to 2018. In contrast,
e-commerce sales rose by nearly 19 percent. Growth in e-commerce directly and positively impacts the demand for industrial space, in
particular last-mile industrial space close to dense urban centers such as New York City and Boston. It also contributes to demand
for large fulfillment centers in suburban locations. Moreover, large brick-and-mortar retailers that avoided bankruptcy are beginning to
adapt to this fundamental shift in the distribution of final sales, such as creating their own online experiences and embracing omnichannel
distribution. These retailers will also contribute to demand for local last-mile industrial space and suburban fulfillment centers.
These factors have contributed to demand for commercial real estate as a hard asset, and to particularly strong demand for industrial
space. As recently noted by Real Capital Analytics, 2019 industrial deal activity as a whole was greater than in 2018, driven by major
portfolio sales and acquisitions.2 In light of trade tensions between the U.S. and China, Canada remains the major source of international
capital deployed to U.S. commercial real estate. Additionally, the full ratification of the United States-Mexico-Canada Agreement (USMCA)
will bolster economic activity. Finally, cap rates by asset class are lower now than just prior to the 2008-2009 global financial crisis. These
events suggest net absorption of industrial space will remain steady in the near term, especially as e-commerce providers continue
to address distribution challenges for purchases and returns.
Key Inputs and Disclaimers
The forecast is based on a process that involves testing more than 40 economic and real estate variables that theoretically relate to demand for
industrial space, including varying measures of employment, GDP, exports and imports, and air, rail and shipping data. Leading indicators that
factor heavily into the model include the Federal Reserve Board’s Index of Manufacturing Output (IMO), the Purchasing Managers Index (PMI)
from the Institute of Supply Management (ISM) and net absorption data from CBRE Econometric Advisors.
ISM, the Federal Reserve and CBRE Econometric Advisors assume no responsibility for the Forecast. The absorption forecast tracks with
CBRE data and may vary when compared with other data sets. Data includes warehouse, distribution, manufacturing, R&D and special purpose
facilities with rentable building areas of 10,000 square feet or more.
Download the NAIOP Industrial Space Demand model (2011) for a full description of the model and methodology.
Actual Versus Forecast
Net absorption in 2019 was lower
than in the previous year, perhaps
reflecting supply constraints and
increased caution in response to
global events (see Table 2). During
2019, 183.3 million square feet of
industrial space was absorbed,
in line with the forecast of 189.1
million square feet.