Sticky Inflation, Higher Rates Put Industrial CRE on Guard
A recent write-up from Marcus & Millichap cautioned that economic signals could be a cause for concern for the industrial sector.
The Consumer Price Index (CPI) increased 3.4% year over year. At the same time, core CPI (excluding food and energy) rose 2.4% annually. According to Marcus & Millichap, “both monthly readings were the highest since May, reflecting renewed energy and other price pressures amid hostilities in the Persian Gulf.”
Along with the higher fuel prices (the gasoline index increased by 3.9%) was economic uncertainty due to evolving tariffs. These “could raise costs further for imported consumer goods, construction materials and business equipment,” Marcus & Millichap said.
Price pressures, combined with federal borrowing needs, have pushed long-term interest rates higher, with the 10-year Treasury yield hitting 5% on Sept. 14. This was, said Marcus & Millichap, “a level touched in 2023, but otherwise unseen since 2007.”
As of Oct. 1, the yield was between 5.23% to 5.33%.
The upshot of the volatility could be ongoing, elevated long-term yields, spurring more uncertainty for businesses, consumers . . . and commercial real estate investors.
Here’s why:
- Increased borrowing costs could slow transactions. Higher debt costs could prolong refinancing hurdles while reducing buyer leverage. Marcus & Millichap also suggested that the trend might cause a wider buyer-seller disconnect on pricing.
- Fuel and transportation costs are hitting industrial occupiers. Higher freight costs could pose a challenge for distribution and logistics tenants, especially those operating truck-intensive networks.
- Net absorption during the first half of the year kept pace with new industrial supply, supporting a 7.8% nationwide vacancy rate in June, representing a more-than-decade-high.
On the slightly positive front, the slowdown of construction activity should help ease supply pressure. This could help “existing properties offset potentially softer demand and rising distribution expenses,” Marcus & Millichap said.
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