Economic Indicators Still Mixed
The U.S. economy has remained remarkably resilient as headwinds continue to gather. The Federal Reserve has slowed its increase in interest rates as inflation pulls back, despite job growth moving higher. The Fed has increased overnight lending rates by 500 basis points from zero in less than 18 months, the highest level in more than 15 years. A shallow recession may still be in the cards, but fears of a deep and prolonged recession appear to be diminishing.
The consumer has been an important driver during the current economic cycle, but spending has slowed, and consumer sentiment remains below historic norms. Manufacturers have reported new orders have fallen, and the housing market has seen activity and sale prices drop. However, the service sector has been persistent, with demand for travel, entertainment, and dining helping to expand the sector. The overall employment market remains tight, with unemployment near historic lows.
Industrial Sector Downshifts As Demand Slows
The industrial market is still in bull territory, but the winds of change may be starting to blow as broader economic softening threatens to squeeze the industrial sector. After 2+ years of skyrocketing demand, the next four to six quarters may prove more challenging for owners, providing tenants an opportunity for leverage. Net absorption remains solid in positive territory but has slowed the torrid pace, which may not bode well for the 500 million square feet of space under construction.
Industrial Tenant View
- Occupiers will keep a close eye on the health of the American consumer to forecast future demand
- Tenants take a closer look at optimizing their existing footprint as lease rates continue to climb.
- The large amount of space under construction will test the lease rate gains of the past three years, as occupiers watch to see if rate growth slows.