High demand, low supply, rising prices and declining vacancy will continue to drive market dynamics. However, economic growth is still stubbornly sluggish and there is a fair amount of uncertainty from a macroeconomic perspective. Monthly swings in job and wage growth are sending a mixed message about the rest of the year, yet our central bankers are optimistic enough to raise interest rates twice in three months and send a strong signal of further near term hikes. The yield on 10-Year Treasuries, the benchmark for setting commercial mortgage rates, spiked to over 2.6% during Q1, but has settled in the 2.3% range of late, which means the markets have already factored in the Fed rate hikes.
The global economy looks to improve further going forward. The Brexit scare was short-lived, and the markets have gotten used to the idea of an EU without the United Kingdom. China and other emerging economies are still facing big challenges, but talk of global recession has subsided in the wake of improved economic indicators around the world.
US economic growth is perhaps more of a mystery. With GDP getting such a slow start in 2017, it’s hard to say where the year will end up. However, the industrial market is largely driven by rapid growth in e-commerce and third-party logistics operators. So, current activity levels are maintainable in the near term. Barring a significant economic event, the industrial property market should continue to expand at the current pace.
Vacancy will keep moving lower in small increments, as the bulk of new construction is concentrated in distribution hub markets with strong, ongoing positive net absorption. Net absorption should remain positive and healthy in 2017, but may moderate in markets that have very low vacancy. Landlords will keep pushing for longer terms and stronger credit, while tenants will look for shorter terms that provide strategic flexibility and the chance for lower rental rates when the market finally corrects. Construction will remain at current levels in areas with ample supplies of land, but will decline further in markets like Los Angeles where land is either unavailable or too expensive for industrial development. Lenders still have money to loan, but will continue to tighten up on underwriting to mitigate potential downstream risk.
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