Industrial’s Pullback in Demand Won’t Last Long, Expert Says

Article originally posted on Globe St. on November 9, 2023

Despite a noticeable drop in demand after a historic, record run recently, there are some real bright spots for the US industrial market, according to a new company news video from Marcus & Millichap.

“We still see room for inventory growth in the mid to long-term just ahead, a big slowdown in the supply pipeline, increases in reshoring and near-shoring that are going to propel demand, and a US economy that is outpacing the rest of the world,” Al Pontius, senior vice president and national director of the firm’s office, industrial, and healthcare divisions, said.

Much of the dialogue in industrial today focuses on the slowdown or pullback in demand, Pontius said.

“But that has to be taken into perspective because a pullback in demand is from white-hot levels, levels that we’ve never seen in the industrial market before, basically, that carried us all the way through the midpoint to the latter part of 2022.”

That surge was a natural extension of supply chain disruption, and eventually catching up and rebalancing of the supply chain and bringing into greater balance supply-demand fundamentals globally, Pontius said.

Looking at inventory levels, for example, “If you look at the sales ratio, or rather, inventory-to-sales ratio pre-pandemic, those levels were higher consistently from any point that we see right now,” he said.

“So, inventory levels have picked up, but the inventory-to-sales ratio continues to trail the averages from where we were pre-pandemic, a bright side for the future of industrial space demand.”

As for the supply side, in 2023, more industrial stock was delivered than ever before, according to Marcus & Millichap.

“Now, that is creating some short-term supply-demand imbalance in many US markets,” Pontius said. “But looking ahead, the average deliveries over the next five years are less than half of what we saw in 2023, all the way down to an average of about 200 million square feet a year compared to the 550 delivered in 2023.”

The business strategy of reshoring and near-shoring is a further boost to industrial space demand in the US, according to the video.

“US companies are clearly biased towards strategies that are going to stabilize the supply chain, and that means more manufacturing in the US as well as near-shoring or in Mexico,” Pontius said.

“And this has a positive impact throughout the US industrial market, but in particular in the Texas and Arizona markets, to be sure.”

He said when talking about the near-term and longer-term prospects for the US industrial market, there’s a safety net represented by the US and the US economy.

“Right now, the US is outpacing everywhere else on the globe in terms of GDP growth,” he said.

“While other countries are slowing down, the US numbers continue to get modified upward. This is going to attract investment capital by companies and investors, and by extension, the prospects for industrial space demand and the strength in the US industrial sector remains very bright.”