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  • K.C. CONWAY Chief Economist | USA

    KEY TAKEAWAYS

    North America is still working on the railroad. Railroad hiring in June grew for the fifth consecutive month, the highest level of total railroad employment (164,659 jobs) since July 2008. Manufacturing and warehousing contributed a combined 26,000 jobs to the disappointing 162,000 net jobs created in August.

    What could derail industrials recovery? For the ninth consecutive quarter, the aggregate North American vacancy rate declined for the 77 markets tracked by Colliers. Q2 vacancy is down 2 basis points to 8.18% (8.63% among the primary 65 U.S. markets and 4.37% among the 12 primary Canadian markets) despite the addition of 23.7 MSF of new supply.

    Both the PMI and Rail Time Indicators show that 2H 2013 will remain strong for manufacturing and industrial activity. Augusts PMI of 55.7 was the highest since June 2011, and YTD 2013.

    Absorption remains strong despite sub-200K monthly job growth. On the heels of nearly 71 MSF of net absorption in Q4 2012, the market absorbed another 92 MSF in 1H 2013 (50.5 MSF in Q1 and 41.5 MSF in Q2.)

    Global GDP forecasts are below trend. The IMFs 2H 2013 GDP forecasts for both Emerging Markets and Advanced Economies appear to be flattening. Lack of robust global GDP growth may impact U.S. industrial real estate as early as 1H 2014.

    Leadership in warehouse leasing continues to come from the inland distribution markets. Six of the top 10 MSAs for Q2 absorption were inland distribution or emerging inland port markets (Atlanta, Dallas, Denver, etc.). Los Angeles and Jacksonville, FL, were the only port markets in the top 10 for Q2 2013.

    New supply continues to increase, but is neither excessive nor speculative. According to Dodge Pipeline, new industrial construction in Q2 increased 28% to 52 MSF. However, this level of new supply is approximately the quarterly average net absorption since Q1 2012 (45 MSF), and more than half is pre-leased or build-to-suit distribution centers for major retailers and manufacturers (Amazon, Nike, Ross, etc.)

    Still working on the Railroad all the live-long day

    HIGHLIGHTSNORTH AMERICA

    WWW.COLLIERS.COM

    Q2 2013 | INDUSTRIAL

    N.A. INDUSTRIAL MARKETSUMMARY STATISTICS, Q2 2013

    US Q2

    2013

    US Q3

    2013*

    Canada Q2

    2013

    Canada Q3

    2013*

    VACANCY

    NET ABSORPTION CONSTRUCTION

    RENTAL RATE**

    *Projected, relative to prior period**Warehouse rents

    MARKET INDICATORSRelative to prior period

    US CAN NA

    VACANCY RATE (%)* 8.63 4.37 8.18

    Change from Q1 2013 (%) -0.20 0.24 -0.15

    ABSORPTION (MSF) 42.0 -0.5 41.5

    NEW CONSTRUCTION (MSF) 17.9 5.8 23.7

    UNDER CONSTRUCTION (MSF) 74.3 11.7 86.0

    *As a result of an inventory re-classification of certain property sub-types, 1Q13 and 2Q13 vacancy rates were adjusted in Q2.

    ASKING RENTS PER SF (USD/CAD) US CAN NA

    Average Warehouse/Distribution Center

    4.81 7.73 5.27

    Change from Q1 2013 (%) 1.12 1.47 1.20

    Ive been working on the railroad

    All the live-long day.

    Ive been working on the railroad

    Just to pass the time away.

    Cant you hear the whistle blowing,

    Rise up so early in the morn;

    Cant you hear the captain shouting,

    Dinah, blow your horn!

  • HIGHLIGHTS | Q2 2013 | INDUSTRIAL | NORTH AMERICA

    Still working on the railroad all the live-long day

    Few areas of the U.S. economy have turned in as consistent a recovery since 2009 as the rail-road industry. Whereas the overall labor market has sputtered, unable to produce even 200,000 net new jobs per month (198,000 per month in 1H 2013and only 148,000 per month from June to August), railroad employment has been consistently adding jobs. Railroad employment in June saw its fifth consecutive month of growth, and reached its highest total165,000since July 2008.

    P. 3 | COLLIERS INTERNATIONAL

    135,000

    140,000

    145,000

    150,000

    155,000

    160,000

    165,000

    170,000

    2006 2007 2008 2009 2010 2011 2012 2013

    May 2013 to June 2013: +220

    CLASS I RAILROAD EMPLOYMENT | JAN 2006JUNE 2013

    Increases of approx. 1,000 employees after Jan. 2013 reflect acquisition of two large railroads by a Class I railroad. Data not seasonally adjusted. | SOURCE: Surface Transportation Board

    949698

    100102104106108110112114

    2010 2011 2012 2013

    EMPLOYMENT | JAN 2010JUNE 2013 (JAN 2010 = 100)

    SOURCE: Surface Transportation Board, Bureau of Labor Statistics

    Class I Railroad Employment vs. Employment for All U.S. Industries

    Sq. Ft. By Region

    Absorption Per Market (SF)q1 '13 - q2 '13

    4,600,000

    2,300,000

    460,000

    -460,000

    -2,300,000

    -4,600,000

    4 billion

    2 billion

    400 mil

    Occupied Sq. Ft.

    Vacant Sq. Ft.

    NORTH AMERICAN INDUSTRIAL VACANCY, INVENTORY AND ABSORPTION | Q2 2013

  • HIGHLIGHTS | Q2 2013 | INDUSTRIAL | NORTH AMERICA

    COLLIERS INTERNATIONAL | P. 4

    INTERMODAL TRAFFIC | CONTAINERS & TRAILERS

    Month Current Year Previous Year Percent Change

    June 2012 248,999 236,714 5.2%

    July 2012 236,515 223,910 5.6%

    August 2012 246,194 235,969 4.3%

    September 2012 246,118 237,397 3.7%

    October 2012 246,695 242,953 1.5%

    November 2012 233,649 230,769 1.2%

    December 2012 222,001 218,328 1.7%

    January 2013 233,726 222,065 5.3%

    February 2013 245,770 222,462 10.5%

    March 2013 233,302 232,087 0.5%

    April 2013 240,505 236,742 1.6%

    May 2013 242,823 235,665 3.0%

    June 2013 252,347 248,999 1.3%

    July 2013 243,725 237,859 2.5%

    SOURCE: AAR Rail Time Indicators

    150,000

    200,000

    250,000

    300,000

    2009 2010 2011 2012 2013

    Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

    AVERAGE WEEKLY U.S. RAIL INTERMODAL TRAFFIC

    Data are weekly average originations for each month, excluding U.S. operations of CN and CP, and reflect revisions to original reporting. | SOURCE: AAR Weekly Rail Traffic

    -10

    -8

    -6

    -4

    -2

    0

    2

    4

    6

    2.71.5 2

    -2.7-2

    -8.3

    -5.4-5.4

    -0.4-0.4

    1.3

    3.93.9

    1.6

    3.93.9

    -1.3-1.3

    2.8 2.82.8 2.83.23.2

    1.41.4

    4.94.93.73.7

    1.2

    2.82.8

    0.11.1

    2.52.5

    1H 101H 11

    1H 121H 13

    UNITED STATES GDP GROWTH RATE (% CHANGE)

    SOURCE: www.tradingeconomics.com | Bureau of Economic Analysis

    And if these employment statistics are not enough to switch your thinking to the other side of the track (you know, the growth track), consider the increases in traffic:

    Total intermodal traffic has shown year-over year growth every month since December 2009 (44 consecutive months), and is up 4.3 percent for 1H 2013. This is a direct result of growth in manufacturing and exports.

    These railroad employment and intermodal traffic metrics mean more demand for U.S. industrial warehouse space, which has translated into a ninth consecutive quarter of improving occupancy, absorption and rental rates for North American industrial real estateespecially in the U.S., where vacancy compressed another 20 basis points to 8.63%, despite the addition of another 17.9 MSF of space. Dont be so quick to believe those Federal Reserve Bank district manufacturing surveys created from anec-dotal information collected from statistically invalid samplings of manufac-turers. Believe what is occurring on the railroads all the live-long day. The Association of American Railroads (AAR) counts it all every month and publishes the findings in Rail Time Indicators, the best forward-looking monthly industrial report you can find. Why use survey data when you can access robust primary data?

    Beyond AARs Rail Time Indicators, other economic measuressuch as GDP and the Institute for Supply Managements Purchasing Managers Index (PMI)indicate that growth in 2H 2013 growth will be volatile and probab ly weaker, due to the return of uncertainty.

    Lets start with GDP, which is on another roller coaster ride. The Advance Estimate of Q1 GDP was 2.4%, which was finally revised to a disappoint-ing 1.1%. The Advance Estimate for Q2 was just 1.7%, but then underwent an initial revised estimate at the end of August upward to a surprising 2.5%. Q2 GDP wont be finalized until September 26. However, given the troubling August jobs report, and the horrific track record of Bureau of Economic Analysis (BEA) in guesstimating GDP, the only certainty is that Q2 GDP will be anything but the BEAs 2.5% forecast. The relevant take-away from GDP is the trend, that suggests that U.S. GDP is slipping back to an anemic level on par with 2H 2009, or even 2H 2012when the looming uncertainty of the elections, sequestration, budget cuts, and the implemen-tation of tax increases and Obamacare sucked the life out of business and consumer confidence. The latest report on GDP also notes that the weak-ness in economic growth is most pronounced in declining government ex-penditures at the federal, state and municipal levels. This will only intensify with Congress at an impasse with the White House over deficit spending and further tax increases.

  • P. 5 | COLLIERS INTERNATIONAL

    HIGHLIGHTS | Q2 2013 | INDUSTRIAL | NORTH AMERICA

    In addition, the International Monetary Fund (IMF) has lowered its forecast for 2013 Global GDP Growth to approximately 3%. The IMFs updated July 2013 global GDP forecast, stratified for Emerging Markets (like those in LATAM) and Advanced Economies (such as the United States, Eu

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