Current Expansion Phase Surpasses Normal Economic Cycle
US economic cycles tend to run for seven to eight years, yet the current expansionary cycle, which started in 2009, already is among the longest on record for the American economy.
HOUSTON—Texas is the second-largest US economy and if it was a standalone country, it would be the 10th largest economy in the world. About 28 million people live in the state.
In addition to in-migration, immigration is important to Houston’s regional economy, according to a recent report by CBRE. Nearly a third of local jobs are held by foreign-born individuals, which comprises 25% of the region’s population base and a labor force participation rate of nearly 70%. That’s about 5% more than native-born workers, GlobeSt.com learns.
And, due to Houston’s global connections, the city participated in $192.2 billion in international trade during 2017, according to the Greater Houston Partnership. According to ExxonMobil’s 2018 Outlook for Energy, China and India will be the main drivers behind global energy demand growth through 2040, accounting for 45% of total word demand growth. Global energy of development countries is expected to reach 70% of total energy demand by 2040 while the combined share of energy used in the US and European OECD nations will decrease 10% to a new low of only 20% of total worldwide energy demand during the same time span. As a result, by 2030, the world’s economic middle class will likely expand from 3 billion to more than 5 billion people. As the nation’s lead exporter of oil, chemicals, plastics and resins, an increase in crude oil and natural gas demand stands to benefit the Houston region.
The current expansion phase for the US industrial and logistics real estate appears poised to surpass the typical lifespan of an economic cycle due to demand from e-commerce companies, says CBRE.
US economic cycles tend to run for seven to eight years. Yet the current expansionary cycle, which started in 2009, already is among the longest on record for the American economy. CBRE’s report highlights two factors that likely will fuel the US industrial market even longer.
First, the industrial and logistics market–warehouses, distribution centers, manufacturing buildings and other industrial facilities–tends to lag the broader economy by a couple of years. Case in point is the industrial market’s recovery didn’t begin until 2011, well after the broader economy had started its rebound. Thus, the industrial market’s expansion isn’t as seasoned.
Second, the rapid growth of e-commerce in recent years has created a permanent, structural shift in the market as an increasing portion of US consumer goods is distributed to consumers through warehouses rather than stores. Given that e-commerce still has substantial room to grow within American retail sales, that ongoing shift likely will continue to support the industrial and logistics market’s expansion.
“There are few historical precedents for e-commerce’s effect on the industrial real estate market,” said David Egan, CBRE global head of industrial and logistics research. “The market still is establishing its new baseline, though most evidence indicates that expectations have reset at higher levels for the foreseeable future.”
Because of these factors, it’s feasible that some markets that are farther along in the current industrial and logistics cycle than most–such as Houston, Milwaukee, Chicago and Los Angeles–and will continue to generate gains, according to the report.
“The start of 2018 is proving to be a pivotal point in bringing Houston’s industrial sector out of the maturation phase and instead cycling it into expansion. Area rents are increasing as the market heats up and vacancy, now as low as 5.2%, signals a tightening market as occupiers seek move-in ready spaces. Warehouse/distribution sites featuring clear heights greater than 24 feet along with dock-high access for trucks are heavily sought after, while manufacturers are seeking locations that can be served by cranes, rail or pipelines that allow incoming and outgoing deliveries with relative ease. Both property types are going to have an active, expansionary summer in Houston,” said Robert Kramp, CBRE director of research and analysis.