Industrial Demand Slows in Wake of Soft Consumer Spending

In the wake of a soft 2016, the economic growth remained weak during the first quarter of 2017. Based on the second estimate of real gross domestic product (GDP) from the Bureau of Economic Analysis (BEA), the United States economy rose at an annual rate of 1.2 percent. While the second estimate was an improvement over the initial 0.7 percent, it was far below the average 3.4 percent typical of first-quarter GDP growth over the 1950-16 period.

The first quarter moderation in economic activity came mostly from a pullback in consumer spending, and to a smaller extent, a decline in government expenditures. Consumer spending—the main component of GDP—was positive, with a scant 0.6 percent annual gain during the quarter. With the winter months milder than expected, consumers cut back on auto purchases to the tune of 13.9 percent, bought fewer clothes and shoes, as well as less gasoline, oil and energy goods. The silver lining during the quarter were higher purchases of furniture and household appliances, which rose 2.9 percent, recreational goods and vehicles (up 13.2%), and grocery store items (up 3.1%). Spending on services rose 0.8 percent on an annual basis, with recreation, transportation and financial services leading the modest gains.

On-line purchases continued on an upward trend in the first quarter of 2017, driving demand for distribution centers. Retail e-commerce sales totaled $105.7 billion in the first quarter of the year, a 14.7 percent gain compared with the same quarter of the prior year, according to the Census Bureau. E-commerce sales represented 8.5 percent of total retail sales.

The first quarter employment numbers advanced, adding 527,000 net new jobs. The wholesale trade sector added 18,300 new jobs during the quarter. The transportation and warehousing sector started the year at a slower pace, adding 1,300 new positions on payrolls.

Industrial properties experienced a slowdown in demand and increased supply during the first quarter of this year. Industrial net absorption totaled 33.1 million square feet, the 28^th quarter of positive demand, according to CBRE. However, absorption was 48 percent lower on a yearly basis. Industrial developers have been busy building new product over the past few years. In the first quarter, completions outpaced demand, as 44.9 million square feet of space came to market, a 13.5 percent increase from the prior year. Industrial vacancy posted a 10 basis point uptick, to 8.0 percent. Industrial asking rents advanced 7.4 percent on a yearly basis, the highest gain since 2007, to an average of $6.71 per square foot.

Commercial fundamentals in SCRE markets remained positive during the first quarter of 2017, but the pace of growth moderated. Leasing volume advanced 2.3 percent from the prior quarter. New construction increased by 2.3 percent from the prior quarter, the slowest pace since the first quarter of 2015. Leasing rates rose by 3.8 percent, as concessions declined 11.1 percent.

Tenant demand remained strongest in the “5,000 square feet and below” segment, accounting for 84 percent of leased properties. Demand for space in the “Under 2,500 square feet” segment was practically flat from the prior quarter, accounting for 45 percent of REALTORS®’ responses. Demand for properties in the “10,000 - 49,999 square feet” notched a noticeable jump, accounting for 11.0 percent of total responses, an almost two-fold increase from the prior quarter.

To access the Commercial Real Estate Outlook: 2017.Q2 report visit https://www.nar.realtor/reports/commercial-real-estate-outlook.