MARKET BRIEF: HEALTHY INDUSTRIAL SECTOR WILL WEATHER ECONOMIC DISRUPTION

KEY TAKEAWAYS:

  • Supply challenges & corresponding inflation are key headwinds to economic growth
  • Nationally, of the 648 MSF of industrial space currently under construction, nearly 40% of it is already committed
  • Average Atlanta industrial rents are resilient, remaining flat or accelerating in 2 of the last four U.S. recessions
  • Atlanta rebounded quickly from the COVID-19 recession, with the second fastest job growth rate in the nation when compared to large-market peers

Economic conditions have shifted significantly over the last two months as U.S. consumers wrestle with rising inflation. Year-over-year CPI growth rose to 9.1% in June from an 8.6% gain in May. Despite full employment and high relative household cash reserves, consumer sentiment is falling according to the University of Michigan Economic Sentiment Survey. With the overall cost of goods now outpacing wage growth, consumers may be more inclined to reduce spending. While industrial performance isn’t directly tied to consumer sentiment, it is an important indicator to track as roughly 70% of U.S. economic activity is tied to household spending.

Sources: University of Michigan Consumer Sentiment Survey, Costar. 2022 net absorption figure is estimated.

Despite the prospect of slowing growth, there are reasons to remain optimistic about the long-term durability of industrial real estate:
  • U.S. industrial vacancy (3.9%) stands at a record low and well short of the industrial long-run average of 7.4% entering this period of slower growth.
  • Nationally, of the 648 MSF of space currently under construction, nearly 40% of it is already committed.
  • If the remaining two-thirds of uncommitted space was immediately added to the inventory with no further leasing activity, overall industrial vacancy would climb to 7.5%, in line with the historical average.
  • Atlanta rebounded quickly from the COVID-19 recession, with the second fastest job growth rate in the nation when compared to large-market peers.
  • Average Atlanta industrial rents are resilient, remaining flat or accelerating in 2 of the last four U.S. recessions.
  • The ISM Manufacturing Index reflects slowing manufacturing activity, but the measure remains in positive territory at 53.0, indicating the manufacturing sector continues to expand.
There are signs of a slowdown ahead. The Atlanta Fed’s GDPNow forecasts second quarter GDP to decline 1.5%, which indicates the U.S. economy may be in a recession given Q1’s decline of 1.6%. But economic cooling is temporary, and arguably needed to allow supply chain pressures to ease. Persistent trends such as the consumer shift to e-commerce, long-term geographical growth characteristics and the fundamental health of industrial real estate paint a brighter long-term picture, particularly in durable and growing markets like Atlanta.