Cracking the Code: Understanding the Key Drivers of Industrial REIT Performance
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
The industrial commercial property market in the United States is experiencing significant growth, driven by various factors including the return of manufacturing to the country and the emergence of new use cases. This article explores how industrial commercial property is performing well in the US, with an emphasis on the influence of manufacturing and certain other industries. We will examine the reasons behind the resurgence of manufacturing in high-end sectors such as medical devices, pharmaceuticals, and electronics while highlighting the importance of nearshoring and its impact on industrial demand. Additionally, we will discuss the expected growth in specific industrial property segments, including last-mile warehouses, distribution centers, cold storage facilities, and cross-docking facilities, as well as rank the top-performing industrial REITs of the first half of 2023.
The Return of Manufacturing to the US:
Manufacturing has seen a surprising and welcome resurgence in the United States, particularly in high-end sectors such as medical devices, pharmaceuticals, and electronics. The US is the world`s largest market for medical devices and pharmaceuticals, leading to a growing demand for these products. Consequently, many manufacturers in these industries are returning their operations to the United States. This return of manufacturing has contributed to the strong performance of the industrial commercial property market.
Manufacturing Demand In US Contained To High-Value Products
The demand for medical devices and pharmaceuticals has been driven by factors such as an aging population, advancements in healthcare technology, and increased healthcare spending. As a result, manufacturers recognize the need to be closer to their primary market and ensure quick and efficient delivery of these critical products, especially in the aftermath of the recent pandemic, where reliance upon foreign suppliers proved problematic. By establishing their operations in the US, they can more easily meet the demand while benefiting from highly-skilled labor and proximity to research institutions and medical hubs.
Electronics Manufacturing
The electronics industry is another significant sector where the US plays a major role. As the demand for electronics continues to grow, manufacturers are bringing their operations back to the US. This return of manufacturing is driven by factors such as improved cost competitiveness, advancements in automation and robotics, and the need for faster innovation cycles. By manufacturing in the US, companies can leverage highly-skilled labor and tap into the country`s advanced research and development capabilities; but this only holds for high-value products.
The Rise of Nearshoring and Other Use Cases:
While manufacturing represents a notable addition to industrial demand, it is important to note that other use cases are more likely to exert influence due to the nature of global supply chains. When manufacturing leaves Asia, it often ends up in Western countries that are friendly to the US, a practice known as friend-shoring or nearshoring. Nearshoring offers various advantages, including proximity to the US market, reduced shipping costs, and easier coordination, not to mention a GDP boost to the friendly manufacturing economy.
Where Does Near-Shoring Capacity End Up?
Industries such as IT and software development, call centers, manufacturing, and customer service are well-suited for nearshoring. IT and software development, in particular, benefit from nearshoring as it requires a high level of technical skills. Countries like India, Mexico, and the Philippines have strong IT workforces and are popular nearshoring destinations for US companies.
Call centers, which require a large number of employees fluent in the customer`s language, are also well-suited for nearshoring. Countries like the Philippines, India, and Costa Rica, with their large English-speaking populations, are attractive destinations for call center operations.
Certain types of manufacturing, including electronics, textiles, and food processing, can also be efficiently nearshored. Proximity to the US market reduces shipping time and costs, enabling companies to respond quickly to market demands and streamline their supply chains.
Customer service, similar to call centers, benefits from nearshoring due to the need for employees who can effectively communicate with customers in their language and understand their culture. Countries with large English-speaking populations like the Philippines, India, and Costa Rica are favored locations for customer service operations.
The Future of Industrial Commercial Property:
The growth of industrial commercial property in the United States is not solely dependent on manufacturing but also on emerging use cases that are driving demand in specific property segments. Some of the key areas expected to experience growth include:
Last-mile Warehouses: These warehouses are located close to major population centers and are used to store and distribute goods to consumers. With the continuous growth of e-commerce, the demand for last-mile warehouses is expected to increase, as they enable quick and efficient delivery of goods to customers.
Distribution Centers: These large facilities serve as hubs for storing and distributing goods to retailers and other businesses. As the economy expands and businesses require efficient supply chains, the demand for distribution centers will continue to grow.
Cold Storage Facilities: With an aging population and increased need for storing temperature-sensitive goods like food and pharmaceuticals, the demand for cold storage facilities is expected to rise. These facilities provide the necessary conditions to preserve the quality and safety of perishable products.
Cross-docking Facilities: These facilities are used for transferring goods from one truck to another, reducing transportation costs and improving logistics efficiency. As businesses seek ways to streamline their supply chains and reduce transportation time, the demand for cross-docking facilities is expected to increase.
The Top-Performing Publicly-Traded Industrial REITs of 2023:
| Rank | Ticker | Total Return (YTD) | Dividend Rate |
|---|---|---|---|
| 1 | PLYM | 37.58% | 0.08 |
| 2 | STAG | 20.96% | 0.05 |
| 3 | EGP | 14.88% | 0.05 |
| 4 | FR | 13.05% | 0.05 |
| 5 | INDT | 12.49% | 0.05 |
| 6 | TRNO | 10.48% | 0.05 |
| 7 | COLD | 7.95% | 0.05 |
| 8 | PLD | 6.10% | 0.04 |
| 9 | LXP | -3.79% | 0.04 |
| 10 | REXR | -7.27% | 0.04 |
| 11 | ILPT | -74.06% | 0.04 |
In Sum:
The industrial commercial property market in the United States is experiencing strong growth, driven by the return of manufacturing to the country and the emergence of new use cases. The resurgence of manufacturing in high-end sectors such as medical devices, pharmaceuticals, and electronics has contributed to the positive performance of the market. Additionally, the practice of nearshoring has become increasingly popular, allowing companies to establish their operations in countries that are closer to the US market and offer skilled labor. While manufacturing is an essential component due to its relevance to maintaining Americans` lifestyles, other industries like IT, call centers, and customer service also contribute to the growth of industrial property valuations. Lastly, the expected growth in specific segments, including last-mile warehouses, distribution centers, cold storage facilities, and cross-docking facilities, highlights the future prospects of the industrial commercial property market in the US.
Other recent articles
Article Search
Share
All Article Categories
