Wondering About Industrial's Future? Take The Long View

Industry eyes have been laser-focused on industrial over the course of the pandemic, as the sector got a big boost from rising e-commerce demand. But as e-commerce activity falls back down to earth, some have questioned what will happen next for the sector. 

To get a sense of how the asset class may perform, look to longer-term trends, says Jim Costello, executive director, MSCI Research, in a new blog.

“As the US moved past the tightest restrictions of the pandemic, however, the pace of growth in e-commerce sales slowed. Some may be tempted to set expectations for the future of e-commerce and industrial property demand and pricing from this recent inversion alone,” Costello writes. “But the shock of the pandemic continues to reverberate through economic and financial data, and looking past the noise to the longer-term trends may be a better guide.”

The Real Capital Analytics CPPI for industrial properties hit new highs over the last year, driving additional investment in the sector during that time. MSCI data shows that the sector grew from a 15% share of the market before the pandemic to a level “consistently above” 20%, which Costello says was tied closely to e-commerce growth and to tenant demand.

Slowing e-commerce growth may compel some industry watchers to think the worst, but Costello says “some return to previous patterns in consumer behavior should not be a surprise.”  E-commerce sales as a share of total retail sales ticked up sharply from 2013 to 2019 and commanded a 16.4% share the second quarter of 2020, in the thick of the pandemic. 

“Fitting a trend to e-commerce sales from the pace of growth from 2013 to 2019 would suggest e-commerce sales would have represented 13.6% of total retail sales in the first quarter of 2022,” he writes. “Instead, e-commerce activity represented 14.3% of all retail sales in the quarter. The pace of growth in total retail sales over this period appears to be an aberration, however, standing well above the long-run trend.”

Costello also notes that personal consumption in the first quarter of this year exceeded that of disposable personal income, “a situation that is not sustainable.” 

“Year-over-year growth in total retail sales had peaked in the second quarter of 2021, exactly one year after the worst parts of the COVID-19 pandemic in the US. Again, the rubber band snapping in the other direction,” he writes. “That pace of growth has generally retreated since, to a trend that pointed to a level closer to historical norms in the quarters ahead. Beyond the year-over-year growth effects, the increase in interest rates in 2022 may make it difficult for households to continue to exhibit stronger growth in consumption than income as the cost to finance that consumption will be rising.”

Ultimately, Costello says, a long-term view will be more valuable to investors over time. 

“The industrial sector also may face some challenges in the near term from this period of readjustment in the allocation of retail activity between e-commerce and in-store channels,” he says. “The sale of industrial properties fell sharply in April following shocks to the 10-year Treasury and mortgage-financing costs. It remains to be seen whether the changing patterns of e-commerce demand may add fuel to that decline as potential buyers try to understand future tenant demand…Setting expectations for industrial tenants’ demand and ultimately asset pricing from the trends shown in a handful of quarters may not be a recipe for success.”