“US industrial markets continue to struggle against a residual overhang of space stemming from the last recession and weak economic fundamentals, which has limited demand,” notes Arthur Jones, senior managing economist at CBRE Econometric Advisors. “Nevertheless steady absorption over the past two years has finally reduced available space to the point where property owners in select markets can now command higher rents.” Jones adds that “While economic and fiscal policy uncertainty continues to constrain demand, we expect the recovery of industrial real estate to accelerate over the next two years.” Helping the recovery along is an absence of new industrial facilities being built, as to date rent growth has not been strong enough to support new construction, says the firm. Only 41 million square feet of industrial space is expected to be completed in 2012, well below the pre-recession historical norm which averaged approximately 150 million square feet on an annual basis, says the firm. However, rent growth is expected to gain momentum, rising from an expected 2.4% in 2012 to more than 3% in 2013 and nearly 5% in 2014, says CBRE. “Industrial rents, while keeping pace with inflation this year, will grow above the rate of inflation in 2013 for the first time since 2006.”

According to the firm, inventory growth remained positive during the quarter and continues to support industrial demand. Inventory changes are one of the most highly correlated demand drivers for the industrial sector—specifically warehouse, which accounts for nearly two thirds of the nation’s stock of space. The correlation between warehouse demand and inventory changes is nearly 80%. Inventories grew by $8.5 billion during the quarter—less than in previous quarters, but still positive. Digging deeper into the numbers, CBRE notes that it is interesting to see that the wholesale trade and manufacturing categories were what actually drove the inventory expansion during the second quarter, and are most directly related to industrial demand.

Industrial production growth was down by 0.6% during the third quarter, as most sectors—and specifically the transportation equipment sector—slowed. As of the most recent report, according to CBRE, the nation’s industrial production index was 97—just 3% below its pre-recession peak. The Federal Reserve’s industrial production index covers all industrial sectors, including manufacturing, mining, and utilities. Natural resource extraction industries continue to boom, says the firm, with the sector nearly 25% above pre-recession levels—led by natural gas and oil extraction, “which continue to benefit from the new shale drilling technologies.” The transportation equipment sector also remains strong at about 5% above prerecession levels, but this is down from Q2, says CBRE. According to the firm, the automobile component is currently at 140.1, which is more than 40% above 2007 levels. “Meanwhile, new manufacturers’ orders, often a precursor to industrial production, continues its recovery as well—up 45% from its recessionary lows.”

In September, the nation’s capacity utilization rate stood at 78.3%, while manufacturing capacity was at 76.8%; both figures are below their long-term averages and represent a slowdown from Q2, says CBRE. Digging into the manufacturing sector’s numbers, some industry groups are operating above their long-term historical averages for capacity utilization, which may foreshadow new investment in infrastructure, including new industrial real estate, says the firm. “The food sector, for example, at 83.6%, is currently operating above its historical average of 82.3%.”