Increased International Trade and E-Commerce Lead to Industrial Demand Ramp Up

Economic activity rebounded in the second quarter of this year. Real gross domestic product (GDP) advanced at a recently revised annual rate of 3.7 percent, to $16.3 trillion, according to the Bureau of Economic Analysis’s estimate. The increase in GDP was driven by higher consumer spending, exports, residential fixed investment, and government spending.

International trade provided uplift to GDP during the second quarter, as export growth outpaced import activity. Exports totaled $2.1 trillion in the second quarter, a 5.2 percent increase on an annual basis. In comparison, imports rose at an annual rate of 2.8 percent, totaling $2.7 trillion. While the balance of trade improved slightly, real net exports remained negative. However, trade activity proved beneficial in boosting demand for industrial space.

Retail e-commerce sales totaled $83.9 billion in the second quarter of the year, an 18.1 percent annual growth rate. As more consumers shift to on-line purchases, distribution centers play a greater role in fulfilling orders—including higher volume of perishable goods, such as groceries.

Payroll employment continued rising, underpinning growing demand for commercial spaces. During the second quarter, 678,000 new employees joined payrolls nationwide, bringing the total for the first half of 2015 to 1.3 million. As industrial leasing has been gearing up to meet the higher demands from increased imports and stronger electronic commerce distribution volume, transportation and warehousing employment gained 39,000 new positions, and wholesale trade employment rose by 9,000 jobs during the second quarter.

Industrial space net absorption continued rising, totaling 102.9 million square feet in the first half of this year, based on JLL data. Warehouse and distribution account for the bulk of the demand (87.8M sq. ft.), followed by manufacturing (13.5M sq. ft.). Supply also rose, with new industrial completions adding 83.6 million square feet to total stock. With demand outpacing supply, industrial vacancies declined to 6.9 percent, a 14-year low, according to JLL. With a tight market, industrial rents rose 5.1 percent.

Fundamentals in REALTORS® CRE markets moved in tandem with the broad markets during the second quarter 2015. Leasing volume during the second quarter rose 5.0 percent compared with the first quarter 2015. Leasing rate growth remained steady, rising 3.0 percent in the second quarter, compared with the 3.0 percent advance in the previous quarter. Industrial availability posted the largest year-over-year decline—246 basis points—to 10.8 percent.

Lease concessions in REALTORS® CRE markets declined 8.0 percent. Tenant improvement (TI) allowances averaged $10 per square foot per year nationally. As availabilities tightened with increased demand, industrial properties recorded the second-lowest TI rates at $6 per square foot per year.

To access the Commercial Real Estate Outlook: 2015.Q3 report visit http://www.realtor.org/reports/commercial-real-estate-outlook.