U.S. Macro Outlook: Mild Recession ≠ Pleasant

First page Previous page 7 Next page Last page

CUSHMAN & WAKEFIELD RESEARCH U.S. Macro Outlook

INDUSTRIAL

WAREHOUSE/DISTRIBUTION RENTS CONTINUE TO CLIMB, IN SOME MARKETS MORE THAN OTHERS (2015 = 100)

goods inflation have been decelerating much more sharply than services inflation. While some predictions sound ominous, there are a few bright spots that will buoy industrial real estate fundamentals in 2023. The e-commerce and third-party logistics (3PL) sectors continue to grow, and a loudening buzz of reshoring is increasing requirements for manufacturing facilities, despite the sector facing contractionary conditions at present. Further, of the massive 683-msf pipeline of new development, 566 msf is speculative. Of that, 424 msf is not pre-leased. Thus, built-to-suit and pre-leasing activity will buttress absorption, which we still believe will be decently positive at 193 msf. Heading into 2024, we believe activity within newly constructed buildings will provide less nominal support to absorption, when we expect only 155 msf of demand. As growth across multiple sectors accelerates in 2024, it will be only a brief time until the industrial market approaches 300 msf of absorption per year again. A slowdown in demand can make it tempting to believe that rents will decline and that there will be some respite for occupiers who have been forced to pencil in 40% increases in real estate costs. Although we expect rent growth will decelerate meaningfully in the near term, it is unlikely to decline. Vacancy is at 3.3% nationwide and the construction pipeline, which is 40% spoken for, has a swift construction cycle, meaning construction will pull back quickly and put a ceiling on how high vacancy can go, despite softer demand. Thus, we see vacancy trending toward 6% by late 2024, which is still historically tighter than at the height of prior business cycles. Rent growth, which occupiers cannot absorb indefinitely in a slowing economy, will moderate toward 5% this year and further toward 1%-2% in 2024. From there, 3%-4% rent growth per annum is consistent with the more sustainable demand fundamentals that we expect to resume. Like all forms of real estate, local dynamics will vary greatly. Some markets are supply-constrained, leading to sub-1% vacancy rates market-wide or at least in key submarkets. Such markets have, in some cases, recorded rent increases of 100% or more since the pandemic began. This is particularly true for primary markets 3 , port-proximate markets and in markets with significant population or migration growth. As few markets will have a large, prolonged imbalance in supply and demand, we remain bullish on the industrial sector, despite some near-term turbulence.

PRIMARY MARKET OUTLOOK

National

Primary Non-Primary

80 100 120 140 160 180 200 220 240 260

2017

2021

2015

2018

2016

2019

2022

2020

2023F

2024F

COASTAL PORT MARKET OUTLOOK