TAG Industrial Watch: March 11, 2023

Despite a noticeable slowdown in leasing demand just as a slew of new deliveries are hitting the market, the optimism in industrial real estate remains upbeat. However, the economic environment is quickly changing as higher interest rates begin to impact an important segment of the industrial market, manufacturing. Unlike the retail industry, the manufacturing industry is far more capital intensive (e.g., machines and tools) and therefore is more sensitive to changes in interest rates.

Recent data from the ISM Manufacturing Purchasing Manager’s Index indicates that the industry is already in a recession (ICIS). Contagion effects are being felt particularly in the intermodal transportation industry as freight movements stumble. As higher interest rates continue to ripple throughout the economy, production costs will steadily rise, squeezing profit margins along the way. On a positive note, manufacturers who also own their properties have an essential lifeline to weather the economic storm in the form of a sale-leaseback. Though industrial properties have started to decline in value, equity levels remain at historic high levels, at least for now.