Like many undergrads in 1971, I went against anything from the “establishment”…
We weren’t impressed with Economics 101, for example.
“Supply and demand” sounded like something the establishment just wanted to shove down our throats. (But at least we knew how to regurgitate enough to pass our exams!)
As the years passed, I matured. Now, five decades later, I understand and embrace market economics.
That’s why I was so shocked to see this headline in the Wall Street Journal last week…
Based on the fundamental laws of economics, that doesn’t make sense…
Falling demand should depress rents (prices).
Industrial real estate investment trusts (“REITs”) own and lease warehouse space. So assuming demand really is dropping, industrial REITs should be suffering across the board.
But at a glance, this space is a microcosm of today’s odd economic conditions…
One REIT earns a “bullish” rating from the Power Gauge. Two others are rated as “bearish” right now. And the rest of the companies in the space are stuck in “neutral.”
So today, let’s use the Power Gauge to dig further…
Industrial REITs seem to be breaking the laws of economics. But as you’ll see, that doesn’t mean this situation will last forever. And for investors, an opportunity could be brewing…
First, warehouse rents are rising…
According to data from commercial real estate services firm Cushman & Wakefield, rents jumped 16% year over year in the second quarter. They’re up 50% since the spring of 2020.
At the same time, demand is really softening…
Cushman & Wakefield’s data showed that warehouse vacancy rates rose from 3% in late 2022 to a little more than 4% in the second quarter of this year. And newly leased space fell 36% in the second quarter.
But we need to consider the big picture…
Sure, demand for warehouse space is currently hitting a soft patch. But overall, demand is still higher than before the COVID-19 pandemic. In early 2020, the vacancy rate was 5%.
The type of demand is shifting, too…
E-commerce demand has come down from the sizzling pandemic pace. People are out and about again. And higher inflation and interest rates have caused some weakening as well.
But a new source of demand is emerging…
You see, more manufacturers are coming into (or returning to) the U.S. And in the coming months and years, they’re going to need a lot of warehouse space.
As a result, rising vacancy rates are likely temporary. When it comes to warehouse demand, the long-term prospects remain favorable.
Warehouse customers know that. They want three- to five-year contracts. They don’t want to wind up emptyhanded when the “spot” rents eventually rise.
Supply is tilting toward more advanced, automation-enabled warehouses as well. Modern logistics providers need these types of facilities. And these places command premium rents.
Ultimately, warehouse-rental trends are looking past the current demand dilemma. And they’re still progressing toward a more positive long-term future.
That’s an encouraging sign for the U.S. economy as a whole.
We’re talking about the “boots on the ground” folks who need to have space available when merchants need it. They know what’s going on long before the official data reflects it.
But for investors like us, this space isn’t a buying opportunity today…
The Power Gauge’s Power Bar ratio tells us all we need to know. Take a look…
That’s the Power Gauge’s breakdown of the 11 industrial REITs it tracks. And as you can see, it’s not a pretty picture…
This industry is mostly in a wait-and-see mode. It’s full of “neutral” ratings right now.
But here’s the deal…
This trend could soon change in our favor.
You see, the Industrial Select Sector SPDR Fund (XLI) has one of the strongest sector-level Power Bar ratios today. That exchange-traded fund currently holds 39 stocks with “bullish” or better rankings. And only four positions rank “bearish” or worse.
In the end, that’s good enough for a “very bullish” rating from the Power Gauge.
Put simply, industrials are still burning hot – even if industrial REITs are acting funny. And since the long-term future for this industry remains bright, it’s worth keeping an eye on.
Good investing,
Marc Gerstein
