Industrial manufacturing real estate assets, a unique subset in the industrial space, and the REITs that manage them present an opportunity in today’s market. In this unpredictable market, net-leased industrial manufacturing sites are proving to be resilient, delivering stability and growth.
The industrial manufacturing property sector has been on an upward trajectory, showcasing remarkable growth and resilience. At the same time, there has been an increase in vacancy levels for industrial distribution space as demand normalizes. Pandemic-era skyrocketing demand led to speculative development in the distribution space, which has led to a bit of a supply/demand imbalance. On the other hand, speculative development is not a factor in manufacturing spaces due to specific space needs.
That said, demand for both warehouse space and manufacturing capabilities remains strong domestically. Since the pandemic, we have also witnessed additional vulnerabilities in the global just-in-time delivery model that has been in practice for three decades, including the war in Ukraine, disruptions in the Suez Canal and environmental constraints with the Panama Canal. All of these factors have given rise to domestic reshoring initiatives.
As more companies bring manufacturing back to the United States, the demand for manufacturing space has surged, leading to improvement in property values. And manufacturing costs are aligning as well. According to a study by Boston Consulting Group, the average cost of manufacturing goods in the United States is now only 5 percent higher than in China and 10-20 percent lower than in major European economies, making the U.S. an attractive location for manufacturers.
This reshoring movement is a transformative trend impacting the national economy and bringing a wave of jobs back to the United States — more than 2 million jobs, with 182,000 of those jobs being added in first half 2023 alone. This trend is supported by government infrastructure bills that are funneling investments into new facilities. The result is a booming demand for specialized spaces to craft both essential and discretionary products, a demand that correlates directly to values of manufacturing properties.
The impact of this reshoring trend extends beyond just the immediate demand for industrial spaces, creating a ripple effect that’s revitalizing entire communities and industrial zones with seven new jobs created in other industries for every manufacturing job brought back to U.S. shores, according to the Economic Policy Institute.
FINANCIAL HEALTH AND STABILITY
The financial underpinnings of industrial manufacturing properties and the REITs that invest in this asset class are compelling. The tenants typically operate under long-term, triple-net leases with annual rent escalations built in. This structure ensures a steady, predictable stream of income with limited exposure to fluctuating costs.
Distinct from other real estate sectors, manufacturing sites are typically “built to suit” a very specific purpose and, while real estate is not usually a key area of focus for the lessee, the spaces where they build their products are fundamental to their business. As such, maintaining the facility has historically shown a high degree of resilience during economic downturns when companies look to shed costs. The essential role of industrial properties in supply chains and manufacturing processes renders them less susceptible to economic fluctuations. Moreover, a focus on sites where essential products are built rather than discretionary products proves to be even more resilient. This stability, coupled with an embedded growth profile, is a significant draw for investors, offering a haven in turbulent financial times.
STRATEGIC INVESTMENTS AND PORTFOLIO MANAGEMENT
Industrial manufacturing REITs offer a niche investment opportunity with a strong financial case and a diversification opportunity that pairs nicely with REIT dividend requirements. These companies and their portfolios offer a fresh approach that sets them up for sustainable growth.
Digging deeper, a triple-net lease REIT focused on the industrial manufacturing sector, with a defined pool of targets, has the ability to be patient and smart with shareholder capital. Not simply bulking up for the sake of growth, there’s a method to the madness — a careful analysis of market trends, product availability and credit quality to optimize acquisition strategies. This strategic maneuvering ensures their portfolios aren’t only robust, they are also primed to deliver top-notch returns.
A WIN-WIN
As more manufacturers look to secure their supply chains by manufacturing goods domestically, demand for manufacturing space grows. And as these manufacturers seek capital to expand their businesses or become acquisitive, they can look to REITs for sale-leaseback opportunities, and REITs can grow through acquisition of quality real estate with creditworthy tenants. All while increasing the job opportunities for Americans.
Looking to the future, the outlook for the industrial manufacturing REIT sector is decidedly optimistic. We’re on the cusp of a dynamic phase, likely marked by strategic consolidations and mergers and acquisitions. Key players in the sector are poised to strengthen their portfolios and widen their market influence. Yet, a thoughtful approach to new acquisitions is being employed, skillfully balancing risk with potential rewards. This calculated strategy is designed to optimize investor returns, ensuring that decisions are made with both foresight and caution.
To recap why industrial manufacturing REITs are a hot pick: Stability, through durable income from creditworthy tenants, and growth, through both contractual revenue increases and smart acquisitions, plus dividends are a big plus for any investor. Industrial manufacturing REITs are a steady ship amidst supply chain ups and downs and economic unpredictability.
Aaron Halfacre is CEO of Modiv Industrial.