NAIOP Forecast: Industrial Space Demand

The NAIOP Research Foundation today released the Industrial Space Demand Forecast, the third forecast from a model that analyzes important economic factors and net absorption data to predict future demand for industrial real estate.

According to the data:

• The current annualized rate of growth (2Q2011) came in near 1 percent, which is slightly lower than the 1.1 percent growth in 1Q2011 and the 1.26 percent growth registered in 4Q2010.

• 2Q2011 growth was on the low-end of historical norms that range from 1-2 percent per year. The finding is consistent with that of the overall economy that has seen GDP growth that is still positive but below long-term averages. In fact, 1Q2011 GDP growth was just revised downward to 0.4 percent and preliminary 2Q2011 GDP growth was a disappointing 1.3 percent.

• 2Q2011 marks the fourth consecutive quarter of positive growth in industrial demand, following seven prior quarters of deep contractions. While many of the underlying fundamental variables at best remained stable this quarter, several categories, including production and inventories, did trend downward.

• Looking forward (see Table 2), virtually all of the demand drivers have trended down in sync with the faltering U.S. economy. While the current conditions remain in the strong to normal categories, the direction and magnitude of the slowdown is troubling looking ahead to future quarters. Strong demand growth isn’t expected until 2012, contingent upon the overall economy resuming GDP growth above 2.5 percent to 3 percent.

• Therefore, demand for industrial space is projected to grow at an annualized rate of 1 percent in 3Q2011, which is at the lowest end of the normal range. Increased rates of growth are expected to occur beginning toward the end of 2011 and into 2012, barring exogenous shocks.

“Demand is slowly returning to what’s considered a ‘normal range’, which gives our members and industrial real estate a bit of optimism moving forward,” said Thomas J. Bisacquino, NAIOP president and CEO. “Much of our continued success is dependent on growth in the GDP and the rebounding economy. As they return to more customary levels, demand for industrial real estate will ensue.”

This is the third forecast for industrial space demand, part of ongoing data and analysis by Dr. Randy Anderson, University of Central Florida, and Dr. Hany Guirguis, Manhattan College. To read a research report regarding the methodology of the forecast and to download an accompanying graphic, visit www.naioprf.org.

Methodology for Industrial Space Demand Forecast Model
Drs. Anderson and Guirguis developed the forecasting model for the demand of industrial space at the national level. Utilizing variables that comprise the entire supply chain and lead the demand for space, the model is able to capture the majority of changes in demand.

While leading economic indicators have been able to forecast recessions and expansions, the indices used in this study are constructed to forecast industrial real estate demand expansions, peaks, declines and troughs. The Industrial Space Demand model was developed using the Kalman Filter approach, where the regression parameters are allowed to vary with time and thus are more appropriate for an unstable industrial real estate market.

This research initially examined nearly 40 real estate, economic and stock market variables that should theoretically be related to demand for industrial space. These variables included measures of employment, GDP, exports and imports, as well as air, rail and shipping data. Two variables, the Federal Reserve Board’s Index of Manufacturing Output (IMO) and the PMI Index from the Institute for Supply Chain Management PMI (ISMPMI), capture the majority of the variation in demand and the entire supply chain.

The IMO is released monthly by the Federal Reserve Board of Governors. The index measures the quality of goods produced, excluding mining and utilities. The ISMPMI is constructed using a survey of purchasing managers’ expectations. The Institute’s monthly survey has five components: new orders, production, employment, deliveries and inventories. ISMPMI leads the IMO and is a leading indicator of production in the industrial sector, followed by the actual goods that are produced, which are portrayed and captured in the IMO data. The information leads firms in their decision making on how much industrial real estate they will demand.

Industrial Space Demand Forecast Data
Issued quarterly, the NAIOP Industrial Space Demand Forecast is based on Purchasing Manager Index (PMI) data provided by the Institute of Supply Management (ISM), Index of Manufacturing Output (IMO) data provided by the Federal Reserve, and net absorption data provided by CBRE Econometric Advisors.

The Industrial Space Demand Forecast was calculated using the data in the following tables:

Table 1
 

Table 2

To access the full report, please visit the NAIOP Research Foundation website at www.naioprf.org.

About the NAIOP Research Foundation:

The NAIOP Research Foundation was established in 2000 as a 501(c)(3) organization to support the work of individuals and organizations engaged in real estate development, investment and operations. The Foundation’s core purpose is to provide these individuals and organizations with the highest level of research information on how real properties, especially office, industrial, retail and mixed-use properties, impact and benefit communities throughout North America. For more information on how to contribute or for complimentary research reports, visit www.naioprf.org.

About NAIOP:

NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial, retail and mixed-use real estate. NAIOP comprises 15,500 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit www.naiop.org.