Time for Investors to Thoughtfully Rethink Industrial

Strategic concerns are best considered with open-ended questions, and Avison Young has a dandy: “How much do investors really need to re-examine, re-define or re-think long-term investment strategies in US industrial/?”

Taking such an approach is important because, as firm principal and head of industrial capital markets Erik Foster noted, “there are many complex economic issues driving capital markets decision making.”

For example, strong rent growth and tenant demand exist simultaneously with “the impact of high inflation, geo-political issues, supply chain disruption, and rising interest rates.”

“Current indicators reflect a strong yet cautious capital markets environment for the near future,” Foster wrote. “In this environment, many investors are re-examining their go-forward strategies and risk tolerance to ensure they are property positioned to navigate potential challenging and volatile economic times over the near-term.”

One separate example was the Prologis earnings call the other day. “On the demand side, the way I think about it is that I’ve been doing this for 40 years,” said CEO Hamid Moghadam. “And I would say, prior to last quarter and the quarter before, let’s call the peak in terms of strength of market on the demand side as a 10 on a one to 10 scale. I think the last quarter and the quarter before were like on 12 or 13. They were just crazy good. And I think this quarter, there may be 9.5 to 10.”

A 9.5 or 10 out of 10/? How could anyone complain. However, Moghadam was thinking in a 40-year context available to him through his own experience. Many people instead might look at any drop and assume troublesome waters ahead.

Or, with supply chain problems, some investors in industrial are pivoting to areas like San Diego, Detroit, and San Antonio, according to a Marcus & Millichap report.

Avison Young notes that average asking rents have seen annual growth of 5.7% during the last five years. In some individual markets, the growth rate is in double digits. With demand high, prices have not hit a new equilibrium. 

“However, while core fundamentals point to a positive outlook for the next 12 to 18 months, there is a steady undercurrent of uncertainty around the broader economic trajectory,” Foster wrote. “Among the concerns on investors’ minds are the potential for a recession; questions about how quickly and how high interest rates will rise; and whether the latest COVID-19 variant will impact supply chains and consumer spending.”

Industrial sales activity during the first half of 2022 was in line with trends from 2018 to early 2020, so resetting expectations is generally wise. But while thinking broadly, act locally and keep in mind the dynamics of specific markets.