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Revival of Consumer Confidence and Streamlined Inventories Herald a Boost in Demand for Industrial Spaces

The momentum for leasing industrial real estate had seen a downtrend across key American cities last year, with a slowdown in business inventory levels and a decrease in imports affecting the flow of goods and, subsequently, the demand for distribution centers. Yet, this trend might be on the verge of a turnaround.

Recent economic indicators point towards a resurgence in the demand for industrial tenants, suggesting that the sector, which emerged as a powerhouse during the pandemic, might be gearing up for a revival.

The demand for large industrial spaces is closely tied to the volume of imported goods being sorted and dispatched to their final destinations, whether that be store shelves or direct to consumers. The increased movement of goods necessitates more industrial leasing, a correlation supported by years of data.

Two critical factors influencing the demand for industrial spaces in the U.S. are national spending on goods and the inventory levels of businesses. Both have shown signs of acceleration as we step into 2024.

A rise in consumer purchasing power, thanks to easing inflation and wage growth, has been a boon. Inflation-adjusted personal income nationwide saw a 4.3% increase over the last year, surpassing its pre-pandemic five-year average growth rate.

This boost in purchasing power, coupled with an increasingly positive view of the economy among U.S. households, as evidenced by jumps in the University of Michigan Consumer Sentiment Index and optimistic financial outlooks in surveys by the New York Federal Reserve, is encouraging more retail spending.

Despite fears of a spending downturn potentially leading to a recession, consumer expenditure on goods has picked up pace since mid-2023, driven by a slowdown in inflation. Online retail, along with spending in general merchandise and specialty stores, has seen significant growth.

Simultaneously, businesses that were cautious of a looming recession and worked to reduce their inventory throughout most of 2023 have now achieved more balanced inventory levels. Major retailers like Walmart and Target have reported streamlined inventories by late 2023, with the inventory-to-sales ratio dropping below pre-pandemic averages. This shift back to stockpiling indicates a readiness to meet anticipated consumer demand.

With inventory rebalancing complete, there's a noticeable halt in the reduction of import orders, suggesting that the flow of goods through ports and distribution networks is poised for growth in 2024, aligned with retail sales momentum.

Although immediate leaps in industrial leasing activity may not materialize early in 2024, the groundwork for increased demand is being laid. Businesses, having observed the economic upturn of late 2023, may soon seek to expand their industrial operations, aligning with the emerging indicators of a resurgence in industrial space demand.

Source: MMCG Analytics, Adrian Ponsen

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