NAIOP Forecast: Industrial Demand on Low-End of Growth Range; Increased Demand Expected in 2012

The NAIOP Research Foundation today released the Industrial Space Demand Forecast, the fourth 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 (3Q2011) was 1.16 percent – in line with the forecast of 1.0 percent and consistent with the readings during the past several quarters that have ranged from 1-1.26 percent.

• 3Q2011 growth was on the low end of historical norms that range from 1-2 percent per year. This finding is consistent with readings of the overall economy that has seen GDP growth that is positive but below long-term averages.

• Nevertheless, 3Q2011 marks the fifth consecutive quarter of positive growth in industrial demand, following seven prior quarters of deep contractions.

• Looking forward (see Table 2), all of the demand drivers have trended downward in sync with the somewhat stagnate U.S. economy. While the current conditions remain in the normal category, 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 more normalized growth.

• Therefore, the demand for industrial space will grow at an annualized rate of 1.09 percent in 4Q2011, which is at the low end of the normal range. Increasing rates of growth are expected to begin to occur into 2012, barring exogenous shocks.

“Sluggish industrial demand signifies that the industry, and this property sector in particular, are reliant on much-needed growth in the national economy,” said Thomas J. Bisacquino, NAIOP president and CEO. “Although minimal, the positive growth industrial has experienced during the past several quarters is a small sign of optimism. It is evident that the industry won’t return to more normal rates of growth until the overall economy stabilizes and businesses begin to spend again.”

This is the fourth 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:

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