E-Commerce Made Warehouses Hot. Trade War Could Cool Them Down.

Date: Wednesday, September 18, 2019
Source: The Wall Street Journal

Slowing business investment, weaker growth, and uncertainty created by the trade dispute are said to be weighing on the sector

The rise of e-commerce has pushed up warehouse rents and made industrial buildings one of the hottest sectors in real estate. Now, a slowing economy and trade dispute between the U.S. and China threaten that boom.

In a new report, trade group NAIOP forecasts that less new industrial space will be occupied over the next two years, compared to the past two years. The group says the difference between new space being occupied and old space being vacated will drop to 37 million square feet per quarter over the next two years, down from 60 million over the past two years.

A shortage of new developments explains part of the slowdown, said New York University economist Joshua Harris, one of the report’s authors. But slowing business investment, weaker growth, and uncertainty brought by the trade dispute are also weighing on absorption, he said.

This was the first time in recent years that “the market didn’t lease to its full potential,” he said.

While Mr. Harris views the sector’s long-term outlook as bright, “industrial is uniquely exposed to trade activity and manufacturing activity, which are very much impacted by the tariffs,” he said, referring to the tariffs on Chinese imports imposed by the Trump administration

Manufacturing activity in the U.S. contracted for the first time in three years in August, according to the Institute for Supply Management’s manufacturing index.

Mr. Harris said that some types of industrial real estate, most notably last-mile logistics facilities in major cities, are still in high demand. Meanwhile, construction of new industrial properties fell to a quarterly average of 42 million square feet in the first half of 2019, according to NAIOP, down from 54 million square feet in 2017 and 2018.

Investors have been undeterred. The dollar volume of industrial properties sold in the U.S. is on track to break its 2017 record this year, according to a July report from Real Capital Analytics. Property sales prices increased by 12.8% between July 2018 and July 2019.

In June, the Blackstone Group agreed to buy a U.S. logistics portfolio from Singaporean investment firm GLP for $18.7 billion—the most expensive private real estate deal in history. Other investment firms such as Ivanhoe Cambridge and Oxford Properties have also made big bets on warehouses over the past year.

Gina Szymanski, portfolio manager for real-estate securities at AEW Capital Management, said industrial real estate is less vulnerable to an economic slowdown than it used to be, largely because of the spread of e-commerce. “That structural change has added a demand driver that wasn’t there 10 years ago,” she said.

 

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