Industrial sector shows resilience

Victor Calanog, director of empirical research, Reis Inc.

As published in Scotsman Guide's Commercial Edition, November 2008.

As brokers seek opportunities with more stability and less risk, the industrial sector stands out. Recent macroeconomic trends have worked to bolster the industrial sector's performance, especially compared to that of office and retail.

Strong international-trade activity has supported the stability of the industrial sector, with robust demand for bulk-warehouse and distribution facilities. In the past two years, the dollar's trade-weighted exchange rate relative to its major foreign trading partners has fallen by more than 15 percent. This has made U.S. exports cheaper in foreign markets, resulting in more exported goods. The number of imported goods also has yet to fall significantly despite the economic malaise.

Manufacturing facilities also benefit from the strong international trade, and leading indicators for industrial production imply positive -- if slightly measured -- growth.

The Federal Reserve's industrial-production index increased 0.5 percent from May to June.

The Institute of Supply and Management's (ISM) manufacturing index surpassed 50 in June, its highest value for 2008, though it fell to 49.9 by August. For perspective, the ISM index averaged 43 during the last recession in 2001. If relative stability continues, this may herald recovery for the manufacturing sector.

Still, the sector does show soft spots. It's vulnerable to risks in the office sector because business-services and research-and-development facilities or "flex" space combine elements of warehouses and office or showroom space. This is an issue because the office sector is regarded to have hit its peak in 2007 and is registering signs of a slowdown.

Although international trade has benefited markets such as Los Angeles and Miami, whose industrial sectors are closely aligned with the global supply chain, areas with smaller, isolated warehouse markets have not prospered as much. These markets include Raleigh/Durham, N.C.; Atlanta; and Memphis, Tenn. Further, if the United States' economic woes continue to drag down global demand, it's unlikely any element of the industrial sector will be spared.

Overall, however, the industrial sector has shown remarkable stability relative to the office and retail sectors. We'll see if this resilience is short-lived or if it can maintain its strong performance in the next few years.

Victor Calanog, director of empirical research at Reis Inc., writes a monthly column on property types for Scotsman Guide. As head of Reis' core economics team, he is responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Nadav Moskovitch, senior analyst in Reis' economics department, contributed to this article.