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4 Economic Trends That Will Impact Industrial Real Estate

Bisnow interviewed Prologis CEO of Europe and Asia Gary Anderson, keynote speaker for I.CON: The Industrial Conference, June 7-8 in Jersey City, New Jersey. See an excerpt of the article below, and register online for the biggest conference in industrial real estate.

The U.S. economy is growing, technology is improving and political struggles are brewing. All will have a direct impact on industrial real estate in the coming months.

As e-commerce gains a greater market share of retail spending, warehouses are in high demand in urban areas near customers. Meanwhile, automation stands to change how goods are packed at facilities and shipped long distances. Amid the positive development, the threat of a trade war and rising interest rates have sparked concern among commercial real estate professionals.

Prologis CEO of Europe and Asia Gary Anderson is at the forefront of industrial real estate activity. Anderson sat down with Bisnow to discuss four global economic trends that could shape the industry.

1. A possible trade war

In early March, President Donald Trump signed two proclamations levying tariffs on steel and aluminum exports. While Mexico and Canada were exempted, China was the most notable target of the proclamation. The tariffs sent shock waves throughout the stock market when China retaliated with its own tariffs, with the Dow Jones falling by more than 730 points. Across CRE, developers and construction companies have already begun to prepare for the rising construction costs that will result from the tariffs.

But for industrial, especially logistics centers, the impact will be less dramatic, Anderson said. Most of the tariff discussions have been focused on raw materials that go into the production side of the supply chain. Most of those types of goods don’t go through warehouses.

Steel, while important in the construction of the warehouse itself, doesn’t typically make its way through a warehouse, so it would have no impact on Prologis’ assets.

“The Prologis portfolio is positioned at the consumption end of the supply chain, so the tariffs would have much less effect on us compared to real estate that serves the production end of the supply chain,” Anderson said.

The threat of a trade war could also have an impact on the shipping industry and ports, which account for 80% of all global trade. With the U.S. and China both threatening to impose a 25% tariff on a range of goods moving between the two countries, maritime shipping volume could fall, along with profits. Tariffs could put up to 7% of Asia-to-U.S. shipping at risk and impact 1% of total global shipping.

Last year, for example, the U.S. shipped nearly 57,000 containers worth of soybeans to China, but tariffs could undermine the volume of exports. The long-term effects of these tariffs are still open for speculation.

“Any trade war is bad for economic growth and would affect every business, including ours,” Anderson said. “If the economy grows slower than it otherwise would, we all would be worse off. But now, I see our customers simply going about their business and I think they will continue to do so until, and if, there is something specific they can react to. Remember, tweets aren’t policy.”

2. Rising interest rates

As the U.S. economy continues to improve, the Federal Reserve has started to raise interest rates to keep up with inflation. After years of historically low rates, the 10-year Treasury yield touched 3% for the first time in four years, signaling to investors that interest rates are continuing to move higher and that now is the time to take on long-term loans or refinancing.

“Interest rates are low by historical standards both in an absolute sense and relative to inflation, and we are projecting that long-term interest rates will rise 50 basis points or more over the near to medium term in the U.S. and Europe,” Anderson said.

Anderson does not see higher rates heavily impacting real estate values in the short term. Current valuations have never factored in ultra-low interest rates, so the normalization of those rates should not have a major impact. Interest rates also typically rise in response to healthy economic growth and inflation, and both situations are positive catalysts for real estate rents, net operating income and property values.

Read the rest of this article on Bisnow.

 

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About NAIOP: NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial, retail and mixed-use real estate. NAIOP comprises 19,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit naiop.org.

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Kathryn Hamilton
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