Orange County Partnership - News

Industrial Markets Post Sluggish Results; ‘Just in Time’ Stock Strategy Returning

Commercial brokerage firm JLL reported recently that rising inflation and economic uncertainties have resulted in the weakening of the once robust industrial real estate market.


JLL reported asking rates for the second quarter of this year at $9.48 per-square-foot up 18.4% year-over-year. However, JLL expects the rate of growth for asking rental rates to start slowing significantly. Absorption tumbled 41.3% year-over-year as only 61.9 million square feet was absorbed, bringing the year-to-date net absorption to 121.1 million square feet. With record amounts of new product being delivered to the market and lagging pre-leasing rates in recent quarters, the vacancy rate climbed to 4.2% at the end of the second quarter.


Preliminary leasing figures show that 112.6 million square feet of leases were executed in the second quarter which JLL described as a “staggering” 46.9% year-over-year decline.


Despite leasing volume currently being lower than what was witnessed during the height of the pandemic, these quarterly figures are more in-line with pre-pandemic levels,” JLL stated. “Nearly half of all leases signed in Q2 were new leases indicating healthy demand for newer industrial product.”


The pace of new ground breakings decelerated 41.3% year-over-year as only 87.9 million square feet of new projects broke ground in the second quarter of 2023, bringing the total number of projects under construction to 592.9 million square feet. Industrial inventory surpassed 15 billion square feet in the second quarter and is expected to reach more than 15.5 billion square feet by the end of 2023


‘Just in Time’ Manufacturing Returns


Brooke Sutherland, an industrial and M&A columnist with Bloomberg, recently penned a column that points out an interesting new trend in the industrial sector—manufacturers are starting to abandon the “Just in Case” manufacturing model imposed during the pandemic to prevent product shortfalls to a “Just in Time” model that will help reduce inflated stockpiles.


In her Sept. 9th article entitled “‘Just-in-Time’ Manufacturing Reasserts Itself,” Sutherland says that many companies are now destocking, “meaning they’re burning through existing stockpiles of goods rather than placing new orders. What started as pockets of pressure in consumer goods and memory chips has spread to chemicals, home generators, roofing shingles, life sciences, residential air conditioners and heating systems, restaurant-grade kitchen supplies, fire and security products, factory automation technologies and electrical equipment, to name a few. The jump in interest rates has made it more expensive to carry extra inventory. Some companies were also likely overordering to guarantee availability during the supply-chain crunch, and improving wait times mean it’s both possible and necessary to regulate that pace. There’s some debate about whether this destocking trend is a sign of weakening economic demand or merely stabilizing supply chains, but what is clear is that companies are increasingly deciding pandemic-era buffers are no longer necessary.”


Rockwell Automation Inc. Chief Executive Officer Blake Moret backed up Sutherland’s destocking view during the company’s earnings call in August. “With improving lead times, machine builders do not need as many months of products on order and are no longer placing unusually large advance orders,” he said. Distributors are still sitting on a high level of equipment that’s been committed to a specific customer but is missing some final components. Once that inventory can be cleared and free cash flow freed up, distributors should start placing orders to restock, Moret added.


In retail, Sutherland noted that there are signs that the inventory destocking that has been playing out over the past several quarters in that sector is nearing an end. At some point, consumers will have to switch back to buying physical goods again. However, mega retailers remain cautious about abandoning the “Just in Time” strategy.


Read the full “‘Just-in-Time’ Manufacturing Reasserts Itself” article at: