“US industrial markets continue to struggle against a residualoverhang of space stemming from the last recession and weakeconomic fundamentals, which has limited demand,” notes ArthurJones, senior managing economist at CBRE Econometric Advisors.“Nevertheless steady absorption over the past two years has finallyreduced available space to the point where property owners inselect markets can now command higher rents.” Jones adds that“While economic and fiscal policy uncertainty continues toconstrain demand, we expect the recovery of industrial real estateto accelerate over the next two years.” Helping the recovery alongis an absence of new industrial facilities being built, as to daterent growth has not been strong enough to support new construction,says the firm. Only 41 million square feet of industrial space isexpected to be completed in 2012, well below the pre-recessionhistorical norm which averaged approximately 150 million squarefeet on an annual basis, says the firm. However, rent growth isexpected to gain momentum, rising from an expected 2.4% in 2012 tomore than 3% in 2013 and nearly 5% in 2014, says CBRE. “Industrialrents, while keeping pace with inflation this year, will grow abovethe rate of inflation in 2013 for the first time since 2006.”

According to the firm, inventory growth remained positive duringthe quarter and continues to support industrial demand. Inventorychanges are one of the most highly correlated demand drivers forthe industrial sector—specifically warehouse, which accounts fornearly two thirds of the nation’s stock of space. The correlationbetween warehouse demand and inventory changes is nearly 80%.Inventories grew by $8.5 billion during the quarter—less than inprevious quarters, but still positive. Digging deeper into thenumbers, CBRE notes that it is interesting to see that thewholesale trade and manufacturing categories were what actuallydrove the inventory expansion during the second quarter, and aremost directly related to industrial demand.

Industrial production growth was down by 0.6% during the thirdquarter, as most sectors—and specifically the transportationequipment sector—slowed. As of the most recent report, according toCBRE, the nation’s industrial production index was 97—just 3% belowits pre-recession peak. The Federal Reserve’s industrial productionindex covers all industrial sectors, including manufacturing,mining, and utilities. Natural resource extraction industriescontinue to boom, says the firm, with the sector nearly 25% abovepre-recession levels—led by natural gas and oil extraction, “whichcontinue to benefit from the new shale drilling technologies.” Thetransportation equipment sector also remains strong at about 5%above prerecession levels, but this is down from Q2, says CBRE.According to the firm, the automobile component is currently at140.1, which is more than 40% above 2007 levels. “Meanwhile, newmanufacturers’ orders, often a precursor to industrial production,continues its recovery as well—up 45% from its recessionarylows.”

In September, the nation’s capacity utilization rate stood at78.3%, while manufacturing capacity was at 76.8%; both figures arebelow their long-term averages and represent a slowdown from Q2,says CBRE. Digging into the manufacturing sector’s numbers, someindustry groups are operating above their long-term historicalaverages for capacity utilization, which may foreshadow newinvestment in infrastructure, including new industrial real estate,says the firm. “The food sector, for example, at 83.6%, iscurrently operating above its historical average of 82.3%.”