Industrial is one of the commercial real estate sectors that faces a host of unknowns, as President Donald Trump's elevated tariffs continue. But not every component of industrial will be hit as hard as others, as is the case often in other uncertain economic times.
For now, we know that absorption was negative in the first half in the top port markets, as monthly TEUs imported into the United States have been declining in recent months, but year-over-year volumes increased by 3.5%, according to a Cushman & Wakefield report. Plus, industrial vacancy has remained elevated, with the national average at 7.1 percent, the CRE firm said in a separate report.
EVERY DAY ITEMS WILL SEE THE BIGGEST IMPACT
But going forward, Adam Petrillo, executive managing director for Newmark’s Industrial Advisory Group, told GlobeSt. that he has "some high degree of concern," although every segment might be different. For example, he puts those involved with perishables or food at the forefront of his worry.
Also, Petrillo noted that clothing will be something to watch as well.
"The sundries we need on an everyday basis are the ones where we're going to feel the 'most amount of pain,'" he admitted.
Luxury goods, on the other hand, might be spared, according to Petrillo. This is because of the "high margins" they come with, and as a result, he thinks the category won't turn into a "massive issue" going forward.
LOCATION MATTERS
Additionally, the tariff impact could vary geographically. The seaport markets stand to face the biggest hurdles, as containerized traffic through these areas is flattening, according to Petrillo.
"That puts downward pressure on one of the three or four different use thesis for distribution centers, if we're talking about distribution centers in those areas," he said.
"So the throughput volumes are down, and those goods are going to generally be shifted out of market, then there's one less reason for demand on the coastal markets, where there are seaports."
Petrillo lists ports in Southern California, Newark and Savannah as a few examples. Meanwhile, he thinks that the South, the center of the country and intermodal hubs will actually wind up finding success in the interiors of the industrial market.
However, he still thinks there will be opportunities for coastal markets, even in less-than-ideal conditions.
"Certainly, there's a ton of demand, from a localized perspective, around most of those," Petrillo acknowledged.
"There is going to be certainly demand for distribution facilities in those areas, but they're the ones that are most likely to be impacted in the short term or in the immediate term because of tariffs."
USMCA STILL OFFERS CERTAIN ADVANTAGES
Meanwhile, one advantage for American industrial players remains — the United States-Mexico-Canada Agreement, which was entered into during Trump's first term and has stayed intact (at least for the most part) despite the recent ignition of the global trade war.
"That really is meant for a repatriation of manufacturing to North America and for us (United States) to access goods that are meant for consumption here, closer to homes, to shorten that supply chain," Petrillo explained of the concept of the USMCA.
He expects the USMCA activity by and large to continue, though he noted there could be "speed bumps" based on certain sectors that are tariffed. Some goods that still come with duties under the trade deal include energy, certain cars and auto parts, among others.
SHORT-TERM PAIN BEFORE POTENTIAL BENEFITS
Short-term, it's fair to expect some pain, perhaps on top of what's happened already. A big issue is that capital is harder to come by, according to Petrillo, as interest rates remain elevated, although there's hope the Federal Reserve decides to lower them next month. Right now, industrial players are assessing everything, including figuring out how to best obtain goods, serve customers and make other decisions to support operations, he added.
But longer term, benefits could be reaped for industrial and manufacturing — but it takes at least a decade to get everything running smoothly, in Petrillo's view. That could be jump-started by some policies that were implemented around the pandemic, like the CHIPS and Science Act of 2022, as highlighted by Petrillo.
Source: GlobeSt/ALM