Industrial Locations That Might See a Slowdown in an Economic Downturn

Virtually every segment of commercial real estate has felt some degree of impact from current economic conditions. Even the darlings, like multifamily.

And although the world has officially passed the Ides of March, PGIM Real Estate thinks many metros will likely be saying, “Et tu, industrial?”

“Economic headwinds have mounted over the past year, and while we believe the Industrial sector will remain resilient, it will not be immune,” said the report. “Should the U.S. enter a recession, markets that are not solely reliant on local economic activity will prove more resilient.”

The company put together three graphs showing industrial rent growth versus growth in per capita disposable income, using data from CoStar, for three categories of area: national, regional, and local.

The national markets were Atlanta; Chicago; Columbus, OH; Dallas; Indianapolis; Inland Empire, LA/Orange County; New York; and St. Louis. These are regions that are major national logistical hubs.

The regional markets: Washington/Baltimore, Charlotte, Cincinnati, Cleveland, Denver, Detroit, Harrisburg, Houston, Jacksonville, Kansas City, Lehigh Valley, Miami, Ft. Lauderdale, Milwaukee, Minneapolis, Nashville, Northern New Jersey, Oakland, Philadelphia, Phoenix, Portland, and Seattle. Their strength tends to be in larger regional areas. They have a transit and logistical importance beyond their immediate areas but don’t serve the same overarching function as the national distribution points.

And then, the local markets, which PGIM took as Austin, Boston, Las Vegas, Norfolk, Oklahoma City, Orlando, West Palm Beach, Raleigh-Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Francisco, and San Jose, which tend to serve their immediate metropolitan areas.

PGIM plotted the changes in industrial rent growth against those of personal disposable income as zero-to-one R-squared statistical values that show the degree to which variations in a dependent variable can be explained by an independent variable. For the national metros, R² was 0.0953, a very low value suggesting that industrial rents were largely independent of local economic changes. The regionals had an R² of 0.3123. The locals, 0.7776, a fairly strong indicator.

“As expected, the more local a market’s scope of distribution, the more a market is tied to the local economy,” PGIM wrote. “That makes local industrial rent growth highly sensitive to changes in local economic growth.”

Diversification in business offers a degree of buffering from adverse economic conditions. If sales of products serving one industry fall because of a slowdown, those addressing other industries might not be affected as much and help smooth out any impact.

“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,” they said. “The combination of limited supply pressures and a cushion provided by their importance to supply chains will drive strong relative performance.”