Across nearly every major U.S. city last year, there was a decline in both business inventories and imports, leading to a reduction in the movement of goods through distribution centers nationwide. However, this trend might be short-lived.
Key economic indicators are already suggesting a rebound in the recent weakness in industrial tenant demand. The sector, which showcased robust commercial real estate performance during the pandemic, could be on the brink of resurgence.
The majority of large U.S. industrial properties serve as facilities for unloading and sorting truckloads of imported merchandise before redistributing them to their final destinations. The flow of goods through the supply chain plays a pivotal role in driving businesses to lease industrial space, a correlation supported by data.
Over the past two decades, the two economic indicators most strongly linked to U.S. industrial space demand have been nationwide spending on goods and the inventory held by U.S. businesses. Both indicators were gaining momentum as we entered 2024.
Consumers’ purchasing power is on the rise as inflation gradually subsides, and wages continue to increase. In the past 12 months, inflation-adjusted personal income has surged by 4.3% nationwide, surpassing the average annual growth of 2.7% in the five years before the pandemic.
With increasing purchasing power, U.S. households are viewing the economic environment more favorably. The University of Michigan Consumer Sentiment Index has shown a notable surge since January, maintaining an upward trajectory since June 2022. Additionally, a nationwide survey by the New York Federal Reserve indicates an increasing percentage of households expecting better financial conditions in the coming year.
Crucially for industrial property performance, rising incomes and improved economic sentiment are driving higher spending on retail goods. After a two-year stagnation from mid-2021 to mid-2023, inflation-adjusted spending on consumer goods is now accelerating, fueled by slowing inflation and a resurgence in consumer confidence.
Contrary to concerns about a decline in spending on goods, the reduction in business inventories observed throughout 2022 is reaching its conclusion. Retailers, anticipating a recession, spent the previous year selling excess inventory accumulated in 2022. However, major retailers such as Walmart and Target have reported leaner inventory levels in late 2023, and the U.S. business inventory-to-sales ratio is now below its pre-pandemic five-year average. Many companies have returned to building merchandise stockpiles, with U.S. business inventories excluding petroleum products and motor vehicles starting to rise again since October.
As inventory levels stabilize, retailers and wholesalers are no longer scaling back import orders. Year-over-year declines in goods imports, prevalent in most of the previous year, are now plateauing. These are clear indicators that the volume of products passing through U.S. ports, border crossings, and distribution centers is poised for growth in 2024, assuming the upward trend in retail goods sales continues.
While immediate improvements in industrial tenant demand may not materialize in early 2024, businesses will likely wait for sustained positive economic momentum from late 2023 before expanding their industrial footprint. Nevertheless, early signs point to a potential upswing in demand for industrial space.