If there has been another time when the economic signs have been more confusing, it’s hard to think of one. Are we already entering a recession, is there one in our future? Will this year see modest or better economic growth? Has inflation been licked, or will it persist while higher interest rates plunge us into the depths of staglation?
Consider these developments from recent news stories:
- UPS is taking drivers out of their cabs and retraining them for inside work at the company’s facilities because it doesn’t have enough driving work for all of them.
- Ttruckload capacity is figured to be 25% above what is currenttly needed, after years of the United States lacking sufficient capacity in this sector at a most crucial time during the pandemic..
- Amazon’s woes are so bad that it is pulling back from its expensive new headquarters project being built in northern Virginia.
- Warehouses receiving freight from U.S. ports are full, and port operators are preparing for a massive onslaught of ships currently being built.
- Because port warehouses are full, ocean lines have been storing containers on truck chassis portside, a parctice that also exacerbates an onging chassis shortage.
- Then there is the generic wierdness that seems to be baked into our country’s 21st Century economy.
This includes a federal government that keeps driving up the country’s debt without exhibiting any real concern, and in recent years indulged in trillions of dollars of deficit spending that set a lit match to a rampant, stubbornly high inflation rate.
Among those who keep a sharp eye on economic developments are the nation’s largest industrial real estate (IRE) companies, who have seen warehousing and distribution needs grow in recent decades with both good and bad economies and in the face of an unprecedented worldwide pandemic.
At present these giant IRE companies are preparing for possibly a slight moderation in warehouse rents and a slower pace of construction and development later this year, but demand has remained high and that is seen to continue, particularly near ports and other logistics hubs.
Yardi Market Insight, a service that makes use of anonymized and aggregated data generated by IRE firms, found that among the 63 markets it studies, 44 have hit a lease spread greater than 10%. Of these, 16 markets had spreads wider than 20% in January, Yardi reported.
The CommercialEdge IRE consulting firm figures that with such substantial spreads, properties with leases that expire soon will become more attractive on the transaction market.
Given the current interest rate environment and economic uncertainty, the company adds that leasing expiration schedules could be the difference between a deal penciling out or not.
“Savvy investors are already seeking out projects with shorter lease expiration schedules and seem to be willing to pay a premium for them. It’s another opportunity to benefit from the historic run-up in rates as vacancy remains tight,” says Peter Kolaczynski, CommercialEdge senior manager.
Logistics continues to be a major driver of industrial real estate development. Nationally, 691 million square feet (msf) of new industrial supply was under construction as of January, accounting for 3.8% of existing inventory.
An additional 706.6 msf were in the planning stages, for a potential stock increase of 7.7%.
While industrial construction is happening in markets across the country, much of it is concentrated in a handful of markets. The 10 largest pipelines make up nearly 40% of all stock under construction and the top two markets (Dallas and Phoenix) account for one-sixth of all square footage currently being built.
Most of this new construction is fueled by the logistics sector, especially in Dallas. The largest project in the market is a 2.5 million-square-foot Walmart fulfillment center in Lancaster, Texas.
“Beyond that property, there are 13 logistics buildings under construction — including both new properties and expansions at existing sites — that are larger than one million square feet,” points out CommercialEdge.
As of January, the national vacancy rate was 4%, an increase of 10 basis points over the previous month. After months of decreases, this marks the second month in a row that the national vacancy rate has increased, the company reports.
“The upticks have been minor but are likely driven by record levels of new supply,” suggests CommercialEdge “It will be worth watching if vacancies continue a slow upward push or plateau off in coming months.”
The lowest industrial vacancy rates in the country were found in the Inland Empire (1.6%), Columbus, Ohio (1.7%) and Charlotte, NC (2.2%).
Other IRE developers and renters of commercial storage also see a similar scenario taking shape, including a market driven by logistics service providers. “Retailers looking to optimize their network have turned to logistics and distribution users to outsource operations, increasing demand for the industry,” says Jones Lang LaSalle.
Ecommerce Plummets
The ecommerce boom that began with a locked-down population during the pandemic, eventually led to a massive upsurge in employment in the warehousing and distribution sector, according to the Bureau of Labor Statistics.
Between April of 2020 and June of 2022, the sector grew by 46%, which resulted in the addition of 695,000 workers. Since that June peak, however, the industry has lost 20,000 workers. Figuring a turnover rate estimated to be higher than 100%, this means that a slowdown in hiring inevitably leads to declining employment.
There are many different factors driving the decline in warehousing and storage employment. A tight labor market is allowing workers to find higher-paying jobs, while service jobs that disappeared during the pandemic have since returned. But the main force behind the contraction is the largest employer in the sector – Amazon.
“The ecommerce behemoth has delayed, paused or outright canceled facilities and listed millions of square feet for sublease,” CommercialEdge says. “Amazon’s frenzied hiring during the first two years of the pandemic fueled most of the growth in the sector but now the company has slowed hiring.”
Where do we go from here? Consumer confidence dropped for the second consecutive month in February, standing at 102.9 (1985=100), down from 106.0 in January, The Conference Board reports.
The board’s Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – fell further to 69.7 (1985=100) from a downwardly revised 76.0 in January.
“Notably, the Expectations Index has now fallen well below 80 – the level which often signals a recession within the next year,” The Conference Board explains. It has been below this level for 11 of the last 12 months. “
