Drivers of Industrial Demand

In April and May, every statistic that is relevant to demand for industrial space has decelerated. Industrial production grew just 0.1 percent after growing 0.4 percent in the first quarter and averaging 1.6 percent quarterly in 2010. The ISM index fell from 61.2 in March to 53.5 in May. This was a much steeper decline than was anticipated, with production and new orders leading the way, falling 15 and 17 points, respectively. Some of these declines in the manufacturing sector can be attributed to the supply disruptions in Japan, but they suggest weak second-quarter growth in the broader economy. Consumers have also slowed during the quarter, with total retail sales remaining flat, creating additional impetus for reduced production and inventories. The ISM inventory component, in fact, turned negative in May.

Total job creation has also slowed, with the government having a negative impact since October 2010 and the private sector adding just 83,000 jobs in May, representing the slowest job creation since June 2010. Even metrics related to the movement of goods have slowed during the quarter. As reported by the ATA Truck Tonnage Index, total goods moved by trucks declined in the second quarter. Activity at U.S. sea ports remains robust, but year-over-year growth in imports slowed to 5.9 percent in May, compared to 9 percent in April. Overall, the U.S. economy grew just 1.9 percent in the first quarter of 2011, and growth in the second quarter is unlikely to be much higher. Economy.com expects 2 percent growth, but some forecasters see it growing closer to 1.5 percent.

Over the next two weeks, Grubb & Ellis researchers will compile our second quarter Market Trends Reports. Just a few months ago, we predicted that demand in the second quarter would match the strong results from the first quarter, when the market experienced approximately 30 million square feet of positive net absorption. Given the weaker economic performance, however, net absorption coming in at half of the last quarter’s number is more likely. Let’s hope for a surprise on the upside.

Source: Economy.com, Grubb & Ellis Research