Why 2024 Is the Year to Invest in Industrial Real Estate

Amidst the economic uncertainties of 2024, industrial real estate is gaining attention as a potential stable investment option for those seeking protection against inflation. As of April 2024, we have seen many more industrial acquisition opportunities hit the market, and we expect this recent pickup of deals to set the tone for real estate valuations throughout the remainder of the year.

With almost 40 years of navigating real estate cycles, we’ve built a track record of successful investments within industrial real estate, which is crucial for investors, developers, and property owners. From our experience, we see many factors making this year the time to invest capital instead of waiting on the sidelines. Reshoring manufacturing, supply chain shifts, investors with available “dry powder,” and other contributing factors are creating compelling opportunities to acquire attractive risk-adjusted industrial properties.

The impact of inflation on real estate

Investing in real estate has long been viewed as an effective hedge against inflation. Unlike many fixed-income assets, “properties are largely valued on income growth potential and in inflationary periods, market rents tend to increase at a similar or greater pace.

Although most leases have contractual annual rent increases of 3 percent to 4 percent, market rents can exceed annual escalations. With industrial real estate, as leases expire, owners have recently been able to mark the leases up to market rates, given strong tenant demand. Additionally, the standard triple-net lease structure for an industrial asset  provides property owners with some  protection from cost escalations.

The reshoring wave boosts industrial demand

Reshoring, the practice of bringing manufacturing and production back to one’s home country from overseas, can significantly boost demand for industrial real estate. Reshoring often involves the establishment or expansion of manufacturing facilities. This requires suitable industrial space to accommodate production lines, warehousing, and distribution centers. As companies bring operations back home, they require adequate industrial real estate to set up these facilities, thereby increasing demand for such properties.

Geopolitical uncertainty and recurring global supply chain disruptions have drawn attention to risks associated with offshoring manufacturing, resulting in a nationwide supply chain transformation focused on reshoring and nearshoring. Reshoring typically involves the repatriation of supply chains, which necessitates proximity to suppliers, customers, and transportation networks. This drives the need for strategically located industrial real estate that offers easy access to highways, ports, and other logistical infrastructure. As a result, industrial properties in key logistics hubs or near major transportation corridors become highly sought after.

This reshoring tsunami is expected to create significant new demand for U.S. industrial and logistics facilities, particularly in the Midwest, Southeast, and Texas markets. Many experts are recommending reshoring or nearshoring as part of a larger strategy that supplements current operations. With companies needing to store inventory and components closer to their end consumers and manufacturing bases, the appetite for well-located U.S.-based logistics space will only increase in the coming years.

Capitalizing on dry powder and market fundamentals

In addition to consumer demand drivers, global supply chain disruptions coupled with geopolitical uncertainty, attractive market dynamics are providing headwinds for industrial real estate investment. Overall, commercial real estate transaction volume is anticipated to accelerate in the second half of the year as the Fed’s interest rate hiking cycle potentially ends. According to BNN Bloomberg, sellers and buyers globally are finally seeing more opportunities to transact after uncertainty nearly froze the market for much of last year. In the article, JLL says there’s $402 billion of dry powder for commercial real estate worldwide, according to data as of October 2023. Given the quantum of dry powder, there will be a considerable first-mover advantage for capital that can deploy quickly and mobilize around opportunities as market fundamentals improve.

Given that we are at the end of the credit tightening cycle, we believe that real estate valuations could find their bottom in 2024. CBRE is estimating that industrial cap rates will peak in early 2024, with slight declines forecasted heading into 2025. While many investors continue to dip their toes back into the market for rates to decline, the current market is ripe, providing an excellent opportunity to acquire industrial real estate.

The rest of 2024 is shaping up to be an opportune time for investors to allocate capital to industrial real estate. With a nationwide supply chain transformation focused on reshoring and nearshoring, leading to a manufacturing resurgence stateside, we are expecting significant demand for U.S. industrial and class B flex real estate for the foreseeable future. Those with the capacity to take action may find themselves in a favorable position to benefit from one of the limited safeguards against the detrimental effects of inflation on conventional asset classes.

Cliff Booth is founder & chairman of Westmount Realty Capital LLC.