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| 1 minute read

Was NAIOP's Industrial Demand Forecast Too Pessimistic?

Last week, NAIOP released its Q1 Industrial Demand Forecast. It predicts the “market for industrial real estate faces headwinds from a large volume of project completions, and a slowing economy” and “supply and demand should return to balance as the rising cost of debt and equity make new construction, especially speculative development projects”.  

I don’t think that a “slowing economy” is in the cards for 2024 and that NAIOP is a bit too pessimistic on that front. In Federal Reserve Chair Jerome Powell’s congressional testimony last week, he said that the Fed is “not far” from the evidence needed to cut the Federal Funds Rate and that cuts would be “appropriate” at some point this year.  

I think the Fed will start its cuts sooner than the NAIOP economists anticipated when they were pulling together their projections. As a result, those slowing falling rates, when combined with inflation hovering around 3% and only a slight increase in construction costs, will mean that the “headwinds” that NAIOP sees are likely to be an ever-so-slight tailwind beginning in the 3rd or 4th quarters. I’m not alone in that. After Jerome Powell’s testimony, Reuters conducted a poll of 108 economists, and 66% of them thought that the first-rate cut would come in June 2024, and almost 20% said that the first-rate cut would be even sooner (in May 2024).   

With the cost of capital decreasing and consumers having more money in their pockets to spend at retailers, it’s hard for me to be anything but (cautiously) optimistic about the prospects for industrial development over the next 6 to 12 months.

Economic Trends Despite a year of heighted fear of a recession induced by the Federal Reserve, the U.S. economy grew 2.5% in 2023 and at a 3.3% annualized rate in the fourth quarter.1 With inflation appearing to slow to approximately 3% by various measures, compared to over 6% in 2022,2 there is growing optimism that interest rates can fall in 2024 and 2025. The markets and most economists now expect a “soft landing” for the economy in 2024. This should help industrial demand increase toward the end of 2025 as rising business confidence combines with a growing economy. Still, economic conditions in 2024 are likely to remain rocky until inflation is within the Federal Reserve’s target range and interest rates have declined.


real estate development & finance, construction, industrial real estate