United States Part 2: What Industrial Markets Might See the Biggest Slowdown in an Economic Downturn?
Feb 22, 2023
10 mins
Economic headwinds have mounted over the past year, and while we believe the Industrial sector will remain resilient, it will not be immune. Should the U.S. enter a recession, markets that are not solely reliant on local economic activity will prove more resilient.
Knowing an industrial market’s scope of distribution, where inventory is shipped to and from, can provide insight into the strengths and vulnerabilities of a market. Based on this, markets can be grouped into three categories: national, regional and local2. National markets, such as Los Angeles, New York and Chicago, have the widest scope, distributing goods to all corners of the country. On the opposite side of the spectrum are local markets, such as Austin, Boston and San Francisco, which serve the immediate metro area. In the middle are regional markets, like Baltimore, Miami and Philadelphia, serving various metropolitan areas in their respective regions.
Exhibit 4: Influence of Local Economy Differs by Market Type
National Markets: Atlanta, Chicago, Columbus, OH, Dallas, Indianapolis, Inland Empire, LA/Orange County, New York, St. Louis.
Regional Markets: Washington/Baltimore, Charlotte, Cincinnati, Cleveland, Denver, Detroit, Harrisburg, Houston, Jacksonville, Kansas City, Lehigh Valley, Miami, Ft Lauderdale, Milwaukee, Minneapolis, Nashville, NNJ, Oakland, Philadelphia, Phoenix, Portland, Seattle.
Local Markets: Austin, Boston, Las Vegas, Norfolk, Oklahoma City, Orlando, West Palm Beach, Raleigh-Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Francisco, San Jose.
Sources: CoStar, PGIM Real Estate. As of February 2023.
As show in Exhibit 4, the correlation between growth in local personal income and industrial rent growth in a market increases from national, to regional and then local. As expected, the more local a market’s scope of distribution, the more a market is tied to the local economy. That makes local industrial rent growth highly sensitive to changes in local economic growth.
National and regional markets benefit from serving a wide geographic area and generally play a critical role in many companies’ supply chains. By contrast, as shown in Exhibit 5, over the past two decades local markets were typically the hardest hit during recessions as measured by declines in occupied space. Similarly, cap rates in local industrial markets historically move up more than the average metro during recessions.
In a downturn, national and regional industrial markets are usually more resilient than local markets, benefiting from diversification of demand sources and preventing sharp declines. Furthermore, it is possible facilities in these metros can be used as storage for excess inventory, ready to be shipped whenever and wherever consumer spending picks back up.
As a result, as we head into a likely U.S. recession, we continue to favor some of the largest regional and national markets, particularly those with high supply barriers such as Los Angeles, New York and Miami. The combination of limited supply pressures and a cushion provided by their importance to supply chains will drive strong relative performance.
