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BOSTON-A study conducted by CBRE Torto Wheaton Research over the past few months reveals surprising findings regarding what drives demand for industrial space in the markets the company tracks. The statistical study by Torto Wheaton senior economists Arthur Jones and Luciana Suran discovered that a significant degree of market-level variation still exists despite the fact that imports are the most significant driver of demand on a national level.

The researchers examined the impact of imports, exports and industrial production on each market to determine the role each category plays in individual markets. “We have written extensively on how weak consumer spending has resulted in a reduction in the amount of goods we import from other countries,” the authors write. “But while demand in some markets is driven mainly by import flow, outgoing goods propel demand in several of our other markets.”

According to Jones and Suran, since early 2006, export growth has taken off while imports have faltered as a result of strong global demand for certain US products and a decline in the relative value of the US dollar. “It is these export-driven markets that have managed to best withstand the national economic slowdown,” they say.

The two researches use Kansas City and Memphis as prime examples of the positive impact of export growth on local markets. “These markets are still seeing strong leasing activity, stable or declining occupancy rates and positive net absorption,” they say, pointing out the two cities have managed to hold their ground despite deteriorating fundamentals in the nation’s industrial market as a whole. They note that nationwide, absorption has turned negative, while availability rates have increased by 90 basis points since the beginning of the year.

“By taking into account the flow of international trade, we can better isolate those markets that will outperform [the market as a whole] by taking advantage of increasing export flows and better identify markets that will be held back as the demand for imports decline,” the authors remark.

As a result of the study, Torto Wheaton is introducing imports and exports to its industrial absorption forecasts, beginning with Q3. “This will have a substantive effect on market-by-market forecasts for gateway cities where imports are a significant driver of warehouse demand and on export-dependent cities where goods are shipped from U.S. producers overseas,” say Jones and Suran.

According to the authors, some interesting trends emerge by distinguishing between markets most affected by imports and those most affected by exports.

“Some markets, like … Los Angeles and Riverside are driven mainly by the flow of goods imported into the United States.,” they say. “Import growth in real terms has actually declined to negative territory, and these import-dependent markets are facing the steepest loss in demand. At the same time, many export-dependent markets such as Kansas City and Memphis have are still experiencing positive demand for industrial space.”

They add that while a global economic slowdown could threaten US export growth, these markets are still poised to outperform the more import-dependent markets. In their opinion, increased dependence on global trade and continued increases in productivity will allow the demand for industrial space to remain strong, despite slowing demographic trends that will constrain employment growth nationwide.

“Increased globalization and a more open US economy over the next 10 years mean that our new long-term industrial outlook will be more optimistic,” they conclude. “Once the downturn has finally passed, the overall pace of growth in warehouse demand will be able to surpass that of real GDP growth.”

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