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Equities Try to Stabilize and Low Short-Term Rates Help Keep the Dollar on the Defensive

Overview:  The sharp recovery in US shares yesterday that saw the S&P 500 snap a five-day slide failed to carry into Asia Pacific trading earlier today.  All the markets fell save India and Singapore.  Losses were led by a 3% drop in Hong Kong…

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Overview:  The sharp recovery in US shares yesterday that saw the S&P 500 snap a five-day slide failed to carry into Asia Pacific trading earlier today.  All the markets fell save India and Singapore.  Losses were led by a 3% drop in Hong Kong as the first increase in the stamp duty (financial transaction tax) since 1993 was announced (0.13% from 0.10%).  Most of the large markets in the region were off 1.5%-2.5%.  Europe's Dow Jones Stoxx 600 is posting minor gains in late morning turnover.  Materials and energy are the strongest sectors.   US shares are firmer, but little changed.  Benchmark 10-year yields are higher, with the US Treasury at 1.37%.  The steep sell-off in the Australian and New Zealand bond market continues.   The five basis point increase today brings the five-day increase to 21 bp and 17 bp, respectively.  Among the major bond markets, the 10-year UK Gilt yield has also risen 17 bp over the past week.  The US 10-year yield is up nine basis points in the same time.    Sterling spiked to almost $1.4240 in early Asian trade but has steadied in the $1.4150-$1.4200 area.  It is not even the strongest currency today.  That honor goes to the New Zealand dollar, which is up about 0.6%  to reach almost $0.7400, a new three-year high.  The Japanese yen and Swiss franc are the laggards with losses of around 0.50% and 0.25%, respectively.  Emerging market currencies are mixed.  Russia, Mexico, and China have stronger currencies, while Turkey, South Africa, and South Korea currencies are softer.  The JP Morgan Emerging Market Currency Index is posting minor gains for the second session.  Gold is quiet and consolidating above $1800. Resistance is seen in the $1815-$1820 area.  Oil is also moving sideways, with April WTI gravitating around the middle of yesterday's range (~$60.70-$63.00).   

Asia Pacific

Australia's Q4 wage index was stronger than expected but does not appear to portend a cost-push threat to the inflation outlook.  The 0.6% increase in the index was twice what the market expected.  The year-over-year rate was steady at 1.4%, the lowest on record.  It appears that the lower wage bill that was a product of the lockdowns was reversed. A pay freeze in the public sector continued.  The slack in the labor market, where unemployment is reported at 6.4% vs. 5.1% before the pandemic, is expected to constrain wage pressures.  

The Reserve Bank of New Zealand kept rates (0.25%) on hold as widely expected.  Its asset purchase program was maintained at NZ$100 bln.  The economic outlook was upgraded.  It now sees last year's contraction at 2.7% rather than 4%, and this year's growth forecast was tweaked up to 3.7% from 3.4%.  Unemployment is expected to peak at 5.2% vs. 6.4% previously.  Nevertheless, the central bank remains cautious and remained committed to its stimulus measures.  It also expected price pressures to ease next year.  

The stamp-duty hike proposal in Hong Kong was part of a larger fiscal announcement by Financial Secretary Chan.  He unveiled HK120 bln (~$15.5 bln) support efforts and forecast growth this year between 3.5% and 5.5% after a 6.1% contraction last year.  Chan proposed boosting the consumption vouchers (HK$36 bln), but economists often see cash handouts being more effective and less expensive to manage than coupons.  The registration tax for private cars may rise 15%, and vehicle license fees could be hiked by 30%. Chan seeks to boost revenue.  

After dipping below JPY105 briefly yesterday, the greenback recovered smartly and rose a little above JPY105.80 in early European activity to test the week's high.  Although the momentum is strong, the intraday technical indicators are stretched.  There is a $373 mln option struck at JPY105.95 that expires today.  Initial support is seen around JPY105.50, and the 200-day moving average is just below there.  The Australian dollar made a marginal new high but stalled in front of $0.7950, where a A$604 mln option is struck that also expires today.  First support is seen near $0.7900 and then $0.7880.  The PBOC set the dollar's reference rate at CNY6.4615, which was a little stronger than the bank models anticipated.  Some demand for the yuan was linked to what appears to be a record sell-off of Hong Kong shares by mainland accounts.  The PBOC injected  CNY10 bln via its open market operations, which stopped the three-day increase in the seven-day repo rate.  Lastly, we note that Taiwan's rating outlook was revised to positive from stable by Moody's.  

Europe

Germany revised up its estimate of Q4 20 growth to 0.3% from 0.1%, leaving the world's fourth-largest economy 2.7% smaller than at the end of 2019 compared with its initial estimate of a 2.9% contraction.  The reported did not appear to have much market impact.  It is old news, and economists and investors anticipate a contraction of 1.0%-1.5% here in Q1 21.  Still, the details, released for the first time, maybe interesting.  Consumption fell 3.3%, twice what economists anticipated, and government spending fell by 0.5% (and Q3 was revised to 0.6% from 0.8%).  Capital investment rose 1.0% (and Q3 was revised up to 3.9% from 3.6%).  

The market has not only given up the idea that the Bank of England will adopt a negative rate, but sentiment has swung toward it being among the first to hike rates.  The December 2022 short-sterling futures contract (a time deposit like the Eurodollar futures) now implies a 26 bp yield.  In early January, it had implied a minus 3 bp yield. Also, while the increase in inflation expectations (as measured by the 10-year breakeven) accounts for the increase in nominal rates in the US. It does not in the UK.  The 10-year Gilt yield has risen by 50 bp since the end of last year to about 0.75%.  The UK 10-year breakeven has risen by about 30 bp (to a little more than 3.3%).  This implies an increase in the real rate in the UK.  

The euro is firm in a narrow range (~$1.2145-$1.2175) inside yesterday's range.  The $1.2200 area is a retracement objective of the decline since the January 6 high near $1.2350.  The single currency has not traded above it $1.22 since January 13.  In fact, with a brief exception, the euro has been confined to a $1.20-$1.22 trading range since early January.   Stops are likely building up on both sides of the range.  There are options for around 1.3 bln euro at $1.2175-$1.2180 expiring today.  Sterling surged to almost $1.4240 in early Asia, and although it is trading nearly a cent below the high, it remains above yesterday's high (~$1.4120). The upper Bollinger Band (two standard deviations about the 20-day moving average) is near $1.4145.  Meanwhile, sterling is extending its streak against the euro.  It is rising for the ninth consecutive session.  On that spike in Asia, the euro fell to about GBP0.8540, its lowest level since last March.  The euro began the streak near GBP0.8780 after finishing last year around GBP0.8940.  

America

US equities recovered yesterday, and since Fed Chair Powell spoke before it, many observers and journalists are linking the two.  Yet, Powell did not really say anything new.  He reiterating and elaborated on his talking points, which are really well known.  The recovery is uneven, and unemployment remains unacceptably high. While the Fed's policies are lifting some asset prices, there are many factors at work, including economic optimism.  Powell shows no sign of wavering about the $120 mln in bond ($80 bln Treasuries and $40 bln Agency MBS) a month.  Of course, inflation is expected to rise.  The Fed is encouraging it, but the issue is whether it is persistent.  The Fed's view seemed to be echoed by Bank of Canada Governor Macklem, who also reaffirmed the desire to let the economy strengthen until actual inflation is at its 2% target.  Macklem observed that inflation was not a problem before the pandemic despite low levels of unemployment.   Powell testifies before the House Banking Committee today.  The questions may change, but the answer remains the same. 

The US report January new home sales today.  The housing market remains a key strength of the US economy. The S&P CoreLogic house price index was reported yesterday, and in December, the index was a little more than 10% higher than at the end of 2019.  A procedural ruling on whether the minimum wage increase can be included in the reconciliation fast-track may be announced today. If it is, the real threat to it comes from a couple Democrats, not Republicans.  In fact, the stimulus bill looks to pass the House of Representatives at the end of the week without a single Republican vote, according to reports.  Mexico report December retail sales.  A 2.7% decline is forecast after a 3.3% rise in November.  Brazil reports February IPCA inflation, and a rise will only firm expectations for a rate hike as early as next month.  The Petrobras board seemed to push against President Bolsonaro's efforts and endorsed market-based fuel prices.  

The overnight US repo rate traded at zero yesterday for the first time since last year's chaos as the pandemic struck.  This is just the latest illustration of the downward pressure on US money market rates.  A key driving force is the Treasury's drawdown of its cash balances at the Federal Reserve.  The process is likely to take a few more months.  It spills over and exerts pressure on the short-dated coupons, like the two-year.  The softness of short-term US rates may make the dollar more attractive to use as a funding currency and may help explain its weakness, despite the rise in long-term rates.  

The US dollar has remained below CAD1.26 support so far today after closing below it yesterday for the first time since April 2018.  It spiked down to CAD1.2560 in Asia before steadying.  The next important chart points are not until closer to CAD1.2500.  While the CAD1.2600 area offers initial resistance, only a move above CAD1.2650 will take the downside pressure off the greenback.  The Mexican peso is extending yesterday's recovery.  Recall that the dollar poked above MXN20.83 on Monday and reading inside Monday's range yesterday but managed to close almost 1% lower and snap a six-day advance.  Today the greenback is near MXN20.38 (the 50% retracement of the rally since February 15 low near MXN19.8925).  The next retracement objective is near MXN20.25.  

 


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Analyzing Capital Market Trends

As the industrial market sees some cooling from pandemic-era highs and financing tightens, what should owners and investors expect over the next 12-18…

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March 12, 2024

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As the industrial market sees some cooling from pandemic-era highs and financing tightens, what should owners and investors expect over the next 12-18 months? Four national experts took the stage at I.CON West to discuss what lies ahead for this popular asset class.  

Capital Raising is Down, Cash is King 

Overall, institutional capital raising was down 30-40% in 2023. Institutional investors have been wary of open-ended funds, portfolios have been trimmed and deals are happening increasingly in cash. Considering the current lending environment, more investors prefer unlevered deals.  

“I’m always surprised how many groups out there are willing to buy all cash,” said Christy Gahr, director of capital markets, North America, Realterm. “It’s taken off over the last year, especially when the cost of debt is 6%.” 

The private equity market is active, and panelists said they see more investment coming from end users. On the debt side, banks are shying away from speculative development projects and focused on smaller transactions last year. Some investors are taking more of a “rifle shot” approach by focusing on targeted, specific projects rather than casting a wide net. There is also interest from life companies that have some liquidity to invest in stabilized industrial product in first-tier markets. 

Not Much Distress, But More Scrutiny 

PJ Charlton, chief investment officer, CenterPoint Properties, commented he wasn’t seeing much distress and certainly not at 2009 levels. However, there are motivated sellers. It is a suitable time to sell assets out of a fund due to the high leasing rates and spectacular rent growth. “Most sellers today have a reason,” said Tim Walsh, chief investment officer, Dermody, “whether it’s a balance sheet-motivated, whether it’s related to some sort of tax structuring or promises they’ve made to investors.” 

What has changed over the past 2-3 years is the approach of investment committees. “Back then it was about aggregation,” said Charlton. “It was all in on industrial… rents were growing 15% a year, cap rates are down another 50 basis points. Interest rates are 3%…  Investment committees are reading every page and scrutinizing every word now. It’s a much more discerning buyer than it was three years ago,” he said. Investment committees are focusing on projects in healthy rent growth markets such as New Jersey, Los Angeles and Miami with $50-$150 million deal ranges.  

“There is a thesis that there’s a slowdown in developments in all our markets,” said Walsh. “Everyone sees it. There are some submarkets where there weren’t any groundbreakings in the first quarter.” However, there will be an overall return to a balanced supply and demand dynamic. 

Embracing ESG 

Investors and tenants are increasingly recognizing the importance of ESG, and the panel agreed bigger credit and quality tenants tend to be more environmentally focused. Dermody has increased its environmental standards, making sure each of their building roofs can structurally support solar panels and installing piping and wiring the parking lots for electric charging. “There is a lot of noise out there when it comes to NIMBYism,” said Walsh, “And I think we need to do more to promote the modern environmentally sensitive product that we’re all building.” 

Additionally, power supply is becoming more of a concern. “Several years ago, everyone was talking about having the right amount of parking. Now the hot topic is having access to power supply,” said Charlton. Several Fortune 500 companies, including FedEx, have promised to reduce their carbon footprint quickly and that means access to electrified parking. “What we’re seeing is that parking is even more important because now you have fleets that need to be able to charge two or three times a day in last-mile distribution facilities,” said Gahr. “It will change aspects of how we invest and how we underwrite and think about what our properties need to be able to provide our users.”  

Nearshoring and Onshoring  

Jack Fraker, president and global head of industrial and logistics capital markets for Newmark, turned the discussion to what is happening near the U.S.-Mexico border and asked the panelists what they are seeing in terms of nearshoring. Gahr commented that so much has changed in a short period and cited several statistics. For example, since 2019, China alone has invested in more than 120 projects in Mexico and in over 18 million square feet of industrial space. U.S.-Mexico trade is now outpacing U.S.-China trade by more than 40%.  

“During the first half of 2023, $461 billion of goods passed through the U.S.-Mexico border, which is 44% higher than the value of goods between U.S. and China,” said Gahr. More than 150 foreign companies said in 2023 that they will open a new operation or expand into Mexico. These sectors include automotive, energy, manufacturing and IT.  

Texas cities Laredo and El Paso were identified as active border markets, and the panelists agreed the best-performing assets are going to be as close to the border as possible. In 2023, El Paso had over three million square feet in total net absorption with a market wide vacancy of less than 4%, according to CBRE. The panelists also discussed the tremendous amount of opportunity in Mexico, although many U.S. development companies have not yet chosen to invest there. Onshoring activity, such as a Samsung project in Austin, is also on the rise. 

Overall, the panel remained optimistic about investments, the economy and interest rates. Unemployment is below 4% and the economy is still growing. Additionally, the level of capital that’s sitting in money markets right now is “at $6 trillion – and that’s $2 trillion higher than it was five years ago,” according to Walsh. “So, the giant pile of money persists. And it’s available as soon as people are comfortable coming off the sidelines.” 

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Centre for Doctoral Training in Diversity in Data Visualization awarded over £9m funding from the EPSRC

Announced today, a new Centre for Doctoral Training (CDT) has been funded by a grant of over £9 million from the Engineering and Physical Sciences Research…

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March 12, 2024

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Announced today, a new Centre for Doctoral Training (CDT) has been funded by a grant of over £9 million from the Engineering and Physical Sciences Research Council (EPSRC) to help train the next, diverse generation of research leaders in data visualization.

A collaboration between City, University of London and the University of Warwick, the EPSRC Centre for Doctoral Training in Diversity in Data Visualization (DIVERSE CDT) will train 60 PhD students, in cohorts of 12 students, beginning in October 2025. The set-up phase will begin in July 2024.

The funding announcement is part of a wider UK Research & Innovation (UKRI) announcement of the UK’s biggest-ever investment in engineering and physical sciences postgraduate skills, totalling more than £1 billion.

DIVERSE CDT will be supported by 19 partner organisations, including the Natural History Museum, the Ordnance Survey, and the Centre for Applied Education Research.

Data Visualization is the practice of designing, developing and evaluating representations of complex data – the kinds of data that lie at the heart of every organization – to enable more people to make real-world use of a source of information which is otherwise challenging to access.

Data visualization can be used to synthesise complex data into a clear story upon which actions can be based. From illustrating how the Covid-19 pandemic made countries poorer, to showing how the processing-power of cryptocurrencies may have driven up the price of high-street graphics cards; data visualization is crucial to society obtaining meaning from data.

However, no current CDT focuses upon training its students in data visualization. This is despite government’s Department of Digital, Media, Culture and Sport listing data visualization as one of the top five skills needed by businesses – with 23% of businesses saying that their sector has insufficient capacity. Likewise, Wiley’s Digital Skills Gap Index, 2021, listed data visualization as the third most needed business and organisational skill for employees to succeed in the workplace in the next five years.

Key innovations of DIVERSE CDT will include students:

Credit: Alex Kachkaev and Jo Wood, City, University of London

Announced today, a new Centre for Doctoral Training (CDT) has been funded by a grant of over £9 million from the Engineering and Physical Sciences Research Council (EPSRC) to help train the next, diverse generation of research leaders in data visualization.

A collaboration between City, University of London and the University of Warwick, the EPSRC Centre for Doctoral Training in Diversity in Data Visualization (DIVERSE CDT) will train 60 PhD students, in cohorts of 12 students, beginning in October 2025. The set-up phase will begin in July 2024.

The funding announcement is part of a wider UK Research & Innovation (UKRI) announcement of the UK’s biggest-ever investment in engineering and physical sciences postgraduate skills, totalling more than £1 billion.

DIVERSE CDT will be supported by 19 partner organisations, including the Natural History Museum, the Ordnance Survey, and the Centre for Applied Education Research.

Data Visualization is the practice of designing, developing and evaluating representations of complex data – the kinds of data that lie at the heart of every organization – to enable more people to make real-world use of a source of information which is otherwise challenging to access.

Data visualization can be used to synthesise complex data into a clear story upon which actions can be based. From illustrating how the Covid-19 pandemic made countries poorer, to showing how the processing-power of cryptocurrencies may have driven up the price of high-street graphics cards; data visualization is crucial to society obtaining meaning from data.

However, no current CDT focuses upon training its students in data visualization. This is despite government’s Department of Digital, Media, Culture and Sport listing data visualization as one of the top five skills needed by businesses – with 23% of businesses saying that their sector has insufficient capacity. Likewise, Wiley’s Digital Skills Gap Index, 2021, listed data visualization as the third most needed business and organisational skill for employees to succeed in the workplace in the next five years.

Key innovations of DIVERSE CDT will include students:

  • undertaking and relating a series of applied studies with world-leading industrial and academic partners through a structured internship programme and an exchange programme with 18 leading international labs
     
  • using an interactive digital notebook for recording, reflection and reporting which becomes a “thesis” for examination, in lieu of the traditional doctoral thesis, and in line with current best practice in data visualization methodology
     
  • being provided with tools that mitigate against the dreaded isolation that PhD students fear, including opportunities for cohort reflection and supportive inclusion via enriching and inclusive processes for admissions, support, and a research environment that addresses barriers for students from under-represented backgrounds; specifically students who identify as female, students from ethnic minority backgrounds and students from lower socio-economic groups.

DIVERSE CDT will be led by Professor Stephanie Wilson, Co-Director of the Centre for HCI Design (HCID) and Professor Jason Dykes, Professor of Visualization and Co-Director of the giCentre, both of the School of Science & Technology at City, University of London.

Members of DIVERSE CDT’s interdisciplinary team include:

  • Professor Cagatay Turkay and Dr Gregory McInerny from the Centre for Interdisciplinary Methodologies, University of Warwick
  • Dr Sara Jones, Reader in Creative Interactive System Design, Bayes Business School at City
  • Professor Rachel Cohen, Professor in Sociology, Work and Employment, School of Policy & Global Affairs at City
  • Professor Jo Wood, Professor of Visual Analytics, and Dr Marjahan Begum, Lecturer in Computer Science, School of Science & Technology at City
  • Ian Gibbs, Head of Academic Enterprise at City.
     

Reflecting on DIVERSE CDT, Co-Principal Investigator, Professor Stephanie Wilson said:

“This funding represents a significant investment from the EPSRC and partner organisations in our vision of an innovative approach to doctoral training. We are delighted to have the opportunity to train a new and diverse generation of PhD students to become future leaders in data visualization.”

Professor Cagatay Turkay said:

“I am thrilled to see this investment for this exciting initiative that brings City and Warwick together to train the next generation of data visualization leaders. Together with our stellar partner organisations, DIVERSE CDT will deliver a transformative training programme that will underpin pioneering interdisciplinary data visualization research that not only innovates in methods and techniques but also delivers meaningful change in the world.”

Dr Sara Jones said:

“I’m really excited to be part of this great new initiative, sharing some of the innovative approaches we’ve developed through the interdisciplinary Centre for Creativity in Professional Practice and Masters in Innovation, Creativity and Leadership, and applying them in this important field.”

Professor Rachel Cohen said:

“DIVERSE CDT puts City at the heart of interdisciplinary data visualization. Data are increasingly part of the social science and policy agenda and it is imperative that those charged with visualizing data understand both the technical and social implications of visualization”

“The CDT is committed to developing and widening the group of people who have the cutting-edge skills needed to visualize, interpret and represent key aspects of our everyday lives. As such it marks a huge step forward both in terms of skill development and representation.”

Professor Leanne Aitken, Vice-President (Research), City, University of London, said:

“Growing the number of doctoral students we prepare in the interdisciplinary field of data visualization is core to our research strategy at City. Doctoral students represent the future of research and expand the capacity and impact of our research. The strength of the DIVERSE CDT is that it draws together our commitment to providing a supportive environment for students from all backgrounds to undertake applied research that challenges current practices in partnership with a range of commercial, public and third sector organisations. This represents an exciting expansion in our doctoral training provision.”

Professor Charlotte Deane, Executive Chair of the EPSRC, part of UKRI, said:

“The Centres for Doctoral Training announced today will help to prepare the next generation of researchers, specialists and industry experts across a wide range of sectors and industries.

“Spanning locations across the UK and a wide range of disciplines, the new centres are a vivid illustration of the UK’s depth of expertise and potential, which will help us to tackle large-scale, complex challenges and benefit society and the economy.

“The high calibre of both the new centres and applicants is a testament to the abundance of research excellence across the UK, and EPSRC’s role as part of UKRI is to invest in this excellence to advance knowledge and deliver a sustainable, resilient and prosperous nation.”

Science and Technology Secretary, Michelle Donelan, said:

“As innovators across the world break new ground faster than ever, it is vital that government, business and academia invests in ambitious UK talent, giving them the tools to pioneer new discoveries that benefit all our lives while creating new jobs and growing the economy.

“By targeting critical technologies including artificial intelligence and future telecoms, we are supporting world class universities across the UK to build the skills base we need to unleash the potential of future tech and maintain our country’s reputation as a hub of cutting-edge research and development.”

ENDS

Notes to editors

Contact details:

To speak to City, University of London collaborators, contact Dr Shamim Quadir, Senior Communications Officer, School of Science & Technology, City, University of London. Tel: +44(0) 207 040 8782 Email: shamim.quadir@city.ac.uk. 

To speak to University of Warwick collaborators contact Annie Slinn, Communications Officer, University of Warwick. Tel: +44 (0)7392 125 605 Email: annie.slinn@warwick.ac.uk

Further information

Example data visualization (image)

Bridges – Alex Kachaev and Jo Wood.

Link to image: bit.ly/3Iy3BRz Credit: Alex Kachkaev and Jo Wood, City, University of London

Data visualization for the Museum of London by Alex Kachkaev (a PhD student) with supervisor Joseph Wood, illustrating where people in London congregate in both inside and outside spaces, showing how a creative use of data can be used to build a picture of human behaviour.

Collaborating labs

Collaborators on the international exchange programme comprise the world’s leading visualization research labs, including the Visualization Group at Massachusetts Institute of Technology (MIT), USA,  the Embodied Visualisation Group, Monash University, Australia;  Georgia Tech, USA;  AVIZ, France; the DataXExperience Lab, University of Calgary, Canada,  and the ixLab, Simon Fraser University, Canada.

About the funder

The Engineering and Physical Sciences Research Council (EPSRC) is the main funding body for engineering and physical sciences research in the UK. Our portfolio covers a vast range of fields from digital technologies to clean energy, manufacturing to mathematics, advanced materials to chemistry. 

EPSRC invests in world-leading research and skills, advancing knowledge and delivering a sustainable, resilient and prosperous UK. We support new ideas and transformative technologies which are the foundations of innovation, improving our economy, environment and society. Working in partnership and co-investing with industry, we deliver against national and global priorities.

About City, University of London

City, University of London is the University of business, practice and the professions.  

City attracts around 20,000 students (over 40 per cent at postgraduate level) from more than 150 countries and staff from over 75 countries. In recent years City has made significant investments in its academic staff, its infrastructure, and its estate. 

City’s academic range is broadly-based with world-leading strengths in business; law; health sciences; mathematics; computer science; engineering; social sciences; and the arts including journalism, dance and music. 

Our research is impactful, engaged and at the frontier of practice. In the last REF (2021) 86 per cent of City research was rated as world leading 4* (40%) and internationally excellent 3* (46%).  

We are committed to our students and to supporting them to get good jobs. City was one of the biggest improvers in the top half of the table in the Complete University Guide (CUG) 2023 and is 15th in UK for ‘graduate prospects on track’. 

Over 150,000 former students in 170 countries are members of the City Alumni Network.  

Under the leadership of our new President, Professor Sir Anthony Finkelstein, we have developed an ambitious new strategy that will direct the next phase of our development.  

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Economic Trends, Risks and the Industrial Market

By a show of hands, I.CON West keynote speaker Christine Cooper, Ph.D., managing director and chief U.S. economist with CoStar Group, polled attendees…

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March 12, 2024

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By a show of hands, I.CON West keynote speaker Christine Cooper, Ph.D., managing director and chief U.S. economist with CoStar Group, polled attendees on their economic outlook – was it bright or bleak? The group responded largely positively, with most indicating they felt the economy was doing better than not.  

Four years ago, the World Health Organization declared COVID-19 a global pandemic, seemingly halting life as we knew it. And although those early days of the pandemic seem like a long time ago, we’re still in recovery from two of its major consequences: 1) the $4 trillion in economic stimulus that the U.S. government showered on consumers; and 2) the aggressive monetary policies that have created ripple effects on the industrial markets. 

Cooper began with an overview of the economic environment, which she called “the good news.” The nation’s GDP is strong, and the economy gained momentum in the second half of 2023 – we saw economic growth of 4.9% and 3.2% in Q3 and Q4 respectively — much higher than expected. “The reason is consumers,” Cooper said. “When things get tough, we go shopping. This generates sales and economic activity. But how long can it last?” 

Consumer sentiment continues to be healthy, and employment is good, although a shortage of workers could impact that moving forward. The U.S. added 275,000 jobs in January, far exceeding expectations. “The Fed raising interest rates hasn’t done what it normally does – slow job growth and the economy,” said Cooper. In addition, the $4 trillion given to keep households afloat during the pandemic has simply padded checking accounts, she said, as consumers couldn’t immediately spend the money because everyone was staying home, and the supply chain was clogged. The money was banked, and there’s still a lot of it to be spent. 

Cooper addressed economic risks and the weak points that industrial real estate professionals should be mindful of right now, including mortgage rates that remain at 20-year highs, stalling the housing market, particularly for new home buyers. Mid-pandemic years of 2020-2021 had strong home sales, driven by people moving out of the city or roommates dividing into two properties for more space and protection against the virus. Homeowners who refinanced in the early stages of the pandemic were fortunate and aren’t willing to list their houses for sale quite yet. 

“The housing market is a big driver of industrial demand – think furniture, appliances and all the durable goods that go into a home. This equates to warehouse space demand,” said Cooper. 

Interest rates on consumer credit are spiking and leading economic indexes are still signaling a recession ahead. Financial markets are indicating the same, with a current probability of 61.5% that we will be in a recession by 2025. However, Cooper said, while all signs point to a recession, economists everywhere say the same thing as the economy seemingly continues to surprise us: “This time is different.” 

Consumers are still holding the economy up with solid job and wage gains, yet higher borrowing costs are weighing on business activity and the housing market. Inflation has eased meaningfully but remains a bit too high for comfort. We’ve so far avoided the recession that everyone predicted, and the Federal Reserve appears ready to cut rates this year.  

For the industrial markets, the good news is that retailer corporate profits are beginning to bounce back after slowing in 2021 and 2022, with retail sales accelerating.  

A slowdown in industrial space absorption was reflected in all the key markets – Atlanta, Chicago, Columbus, Dallas-Fort Worth, Houston, the Inland Empire, Los Angeles, New Jersey and Phoenix – but was worst in the southern California markets, which have since been rebounding.  

“Supply responded to strong demand,” Cooper said. “In 2021, 307 million square feet were delivered, followed by 395 million in 2022. In 2023, we saw 534 million square feet delivered – that’s almost 33% higher than the year before.” 

The top 20 markets for 2023 deliveries measured by square feet are the expected hot spots: Dallas-Fort Worth (71 million square feet) leads the pack by almost double its follower of Chicago (37 million), then Houston (35 million), Phoenix (30 million) and Atlanta (29 million). Measured by share of inventory, emerging markets like Spartanburg, Pennsylvania, topped the list at 15 million square feet, followed by Austin (10 million), Phoenix and Dallas-Fort Worth (7 million), and Columbus (6 million). 

“Developers are more focused on big box distribution projects, and 90% of what’s being delivered is 100,000 square feet or more,” Cooper said. Around 400 million square feet of space currently under construction is unleased, in addition to the around 400,000 square feet that remained unleased in 2023. “Putting supply and demand together, industrial vacancy rate is rising and could peak at 6-7% in 2024,” she said. 

In conclusion, Cooper said that industrial real estate is rebalancing from its boom-and-bust years. Pandemic-related demands and accelerated e-commerce growth created a surge in 2021 and 2022, and the strong supply response that began in 2022 will continue to unfold through 2024. With rising interest rates putting a damper on demand in 2023, vacancies began to move higher and will continue to rise this year.  

“Consumers are spending and will continue to do so, and interest rates are likely to fall this year,” said Cooper. “We can hope for a recovery from the full effects of the pandemic in 2025.” 

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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