The US industrial sector continues to show strength

As 2022 unfolded, a few important trends started to emerge that will define the industrial outlook in 2023. First, goods spending started to taper back toward pre-pandemic trend levels as stimulus and excess savings have largely been spent, and spending shifted increasingly towards services like travel and entertainment. Second, e-commerce growth reverted to its pre-pandemic trend i.e., online sales are still capturing a greater share of total retail sales relative to pre-pandemic levels, but the rate of growth has slowed. Third, higher interest rates began to weigh on demand for items sensitive to financing conditions, especially durable goods.

The outlook for U.S. industrial remains positive, despite some headwinds stemming from tighter financial conditions and less rosy job prospects. The positive outlook is supported by three structural drivers over the medium to long term:

1. E-Commerce Growth – As the pandemic pushed consumers and retailers online, e-commerce share of retail sales reached record highs. As this push included many new product categories, from pharmacies to food to consumer staples, a large part of the push will likely be permanent, accelerating e-commerce adoption by perhaps as much as 10 years. Important to consider in this context is that E-Commerce operations require up to 3x the amount of space compared to a similarly sized brick & mortar operation to handle returns and since none of the inventory can be stored at store fronts.
2. Transition from “Just-in-Time” to “Just-in-Case” – COVID-19 has been one of the greatest supply chain disruptors in recent history. This disruption will likely push business to partially reverse the long-standing transition to “just-in-time” inventory, where inventory levels are thin relative to sales in order to gain efficiency. Having products and parts on hand “just-in-case” they are needed in a disrupted supply chain environment has become more important than gaining efficiency. Storing this larger safety stock of inventories enlarges the industrial footprint and the need for warehouse space.
3. Supply Chain Diversification – Tariffs and the COVID-19 pandemic have combined to highlight the need for a more diversified supply chain across global and domestic sources. East Coast, Gulf of Mexico, and inland trade hubs are likely to benefit from a more flexible and diversified supply chain model as retailers and manufacturers look to reduce risk of relying solely on China as their supply partner. With less industrial warehouse space available in those emerging trade hubs, locations particularly in the Southern U.S. such as Charlotte, Charleston, Atlanta, Dallas or Houston are likely to outperform in the near term, even if there is a national slowdown.