By Michael Schaeffer, Executive Managing Director, Practice Leader, Industrial, Valuation & Advisory
The U.S. economy is poised for even more growth – at least according to the latest economic data on consumer spending, global trade manufacturing, intermodal rail volumes, and other metrics. According to our firm’s U.S. Macro Forecast – which we released in February 2018 – real GDP has averaged about 2% growth per year throughout the last economic expansion, and business and consumer confidence are soaring (a trend that will likely continue thanks to the recently enacted tax reform legislation). Over the last nine months, the economy has been growing at a 3% rate, and we predict real GDP will continue to grow by approximately 2.7% in 2018. And, since the health of the commercial real estate industry tracks well with the broader economic outlook, we think 2018 will also be a strong year for property markets.
And, perhaps in no sector is that growth better positioned than the industrial market, which investors indicate will remain strong in 2018. Last year, industrial was the only major property sector to post growth in deal activity for the year, with deal volume increases across all industrial subtypes and geographies. Rents are growing, fueled by healthy demand from logistics and distribution users, and major markets with the lowest vacancies at the close of 2017 included Los Angeles; Orange County, CA.; Oakland; Cincinnati; San Jose; Central Valley, CA.; and Central New Jersey. As of the fourth quarter of 2017, more than 242.2 million square feet (msf) of industrial product was under construction, and we expect leasing demand to keep pace with supply deliveries in the near term. The U.S. industrial market has also recorded more than 240 msf of absorption for four straight years – the longest run on record.
The demand for Class A product with access to transportation nodes like rail, port, and intermodal services will likely remain strong. Investors have signaled that the top 10 U.S. markets they expect to command premium pricing for these types of assets include Atlanta; Chicago; Cincinnati; Denver; Eastern/Central Pennsylvania; Central and Northern New Jersey; San Francisco Bay Area; Seattle; Southern California (particularly the Inland Empire); and South Florida (particularly Miami). And, while Class A overall cap rates have compressed below 5% in Southern California, New Jersey, Seattle, and South Florida, making these markets some of the most aggressive in terms of pricing, high-population growth markets like Las Vegas, Phoenix, Salt Lake City, Indianapolis, and Nashville are popping up on investors’ radar screens as new opportunities. In addition, investors have signaled renewed interest in Class B assets, which they view as having greater upside potential for rental rate increases.
The potential downsides? The labor market, for one. While 2017 marked the sixth consecutive year of at least two million job gains, the rate has slowed from the breathless pace of prior years. The unemployment rate ended 2017 at 4.1% and the underemployment rate closed the year at 8.1%, both among the lowest of the last half-century. And while we expect another two-million-job-creation year, a potential rebound in labor force participation could boost payroll growth.
Overall, our survey results indicate that investors will remain aggressive, but pricing and overall rates will begin to stabilize. Investors remain cautiously optimistic in the near term, and seaport cities and major logistics hubs are expected to be the year’s strongest performers. And, since the demand for industrial space is largely linked to consumer spending, we think that engine will remain strong in 2018 as online sales continue to rapidly advance.
For more information and to view our investor survey results, click here.
Michael Schaeffer is the Executive Managing Director and National Practice Leader of Industrial in Cushman & Wakefield’s Valuation & Advisory division. In 2017, the group was responsible for appraising properties valued at more than $292.2 billion, involving virtually every industrial property type.