Reduced rates should lead to renewed industrial demand although they’ll probably not fall to previous lows.
Digital shopping and population trends suggest a long runway for e-commerce-driven industrial demand growth.
Market selection has historically mattered for above-average return potential. We expect that it’ll play a significant role.
The emergence of e-commerce and low interest rates accelerated industrial demand in the 2010s. And again, when digital consumer spending surged during the COVID-19 pandemic in 2020-21. Now that digital purchases have normalized from pandemic highs and industrial leasing has cooled in response to interest rate escalation, what’s the outlook for industrial demand? Here are three key takeaways from our research. (Read our analysis in Industrial demand: What we expect.)
The past two years of higher interest rates have caused many tenants to pause their leasing plans, which along with record supply levels caused revenues to slip. But the 50-basis point cut of the fed funds rate on September 18 should bring short-term rates lower and reinforce the recent fall of long-term rates. Reduced rates should lead to renewed industrial demand. But rates will probably not fall to the lows following the Global Financial Crisis or trough levels in response to the pandemic.
US retail e-commerce sales are projected by Moody’s Analytics to double from 2023 levels in a little more than a decade. (See chart below.) This robust e-commerce outlook reflects generational differences in digital shopping behaviors and the related demographic trends. E-commerce activity requires more warehouse space than storefront retail activity, making e-commerce growth particularly important to industrial demand.
This recovery will not likely match the strength of the late-2010s or the pandemic surge. Market selection will play a larger role in the search for higher investment returns. The difference of average revenue growth between top-third markets versus bottom-third markets has been three percentage points or higher historically, based on five-year rolling periods going back to 2001.1 For this reason, choosing markets and assets that can deliver higher property income growth will become more important for investors seeking above-average investment returns.
Read our entire analysis in Industrial demand: What we expect.
Source: Invesco Real Estate, utilizing data from Green Street as of August 2024. Based on analysis of 50 metropolitan markets total per period.
The public REIT market can serve as a leading indicator for the private property market, so we believe private US real estate is poised for recovery.
Each month, the Invesco SteelPath team provides an update and insight on the most recent midstream industry happenings. Each monthly commentary provides: market performance update, recent news, and chart of the month.
Matt Brill talks about his expectations for the Federal Reserve, his bullish view of investment grade credit, and opportunities in high yield, emerging markets, commercial real estate, and retail.
Important information
NA3920783
Image: Luis Alvarez / GETTY
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
A basis point is one-hundredth of a percentage point.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
The federal funds rate is the rate at which banks lend balances to each other overnight.
Investments in real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents, or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
The opinions referenced above are those of the author as of Oct, 7, 2024 These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results.
They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
This link takes you to a site not affiliated with Invesco. The site is for informational purposes only. Invesco does not guarantee nor take any responsibility for any of the content.
