Are these lead indicators pointing to an increase in industrial occupier activity?

October 11, 2013 / By

Two lead indicators that I monitor suggest an improvement in Sydney industrial occupier demand in the next six months.

We have previously demonstrated that there is a strong relationship between shipping container trade and industrial occupier demand (as well as rents and land values). In particular, turning points in the growth rate of shipping container volumes are a good indicator of turning points in the change in occupier demand.

Port Botany Shipping Container Trade and Sydney Industrial Occupier Demand

Source: Jones Lang LaSalle Research, NSW Ports

So it’s worth looking at more timely data series than shipping container trade that can give us an indication of when industrial warehouse demand will improve or worsen. I have identified three timely, reliable monthly indicators that have a reasonable lead relationship with container volume growth (and that have an indirect relationship to industrial gross take-up). One is a consumer survey and the others are business surveys.

Firstly, the Westpac-Melbourne Institute Survey of Consumer Sentiment, when presented as a rolling annual growth rate, shows a clear six month lead relationship with Sydney Ports total container trade (TEUs) rolling annual growth rate. This series has been indicating that an increase in activity has been likely for several months now. This relationship remains intact – the latest reading of rolling annual growth in container trade was up 5.1% in August 2013, up from 1.7% in August 2012. The current reading of Consumer Sentiment indicates container trade growth could lift to around 10% within the next few months, suggesting stronger demand for warehouse and distribution space.

Secondly, the manufacturing Purchasing Managers’ Index (PMI) series for both China and Australia (the China PMI is produced by HSBC and compiled by Markit Economics and the Australian PMI is produced by Australian Industry Group) also look to be reasonable indicators of container trade activity. Intuitively this makes sense… East Asia (China) is the primary source of origin for much of Australia’s containerised imported goods.

So, what are they telling us about occupier demand going forward? The Australian PMI when looked at on a cumulative 12 month basis troughed last September and has been improving since. The China PMI, also on a cumulative 12 month basis, has recently troughed and is displaying accelerating growth. Both indicate the improved growth rate of Sydney Ports container trade witnessed since late last year is set to continue.

These indirect macro-economic indicators of industrial sector occupier demand may be unorthodox, but they have proven to be reasonable lead indicators of turning points in demand growth. As a result, we expect to record an improvement in leasing activity over the next 6 to 12 months in Sydney as demand for warehouse and distribution facilities increases.

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