Industrial REITs Seem to Break the Laws of Economics

Editor's note: As investors, we want to pay attention to quirks in the market. Right now, Marc Gerstein from our corporate affiliate Chaikin Analytics is digging deeper into one sector's strange behavior. And in this essay – recently published in the Chaikin PowerFeed free e-letter – he explains why it could soon create a buying opportunity...

Like many undergrads in 1971, I went against anything from the "establishment"...

We weren't impressed with Economics 101, for example.

"Supply and demand" sounded like something the old guard just wanted to shove down our throats. (But at least we knew how to regurgitate enough to pass our exams.)

As the years passed, I matured. Now, five decades later, I understand and embrace market economics.

That's why I was so shocked to see this headline in the Wall Street Journal earlier this month...

Based on the fundamental laws of economics, that doesn't make sense...

Falling demand should depress rents (prices).

Industrial real estate investment trusts ("REITs") own and lease warehouse space. So assuming that demand really is dropping, industrial REITs should be suffering across the board.

But at a glance, this space is a microcosm of today's odd economic conditions...

The Power Gauge system – a tool we use at Chaikin Analytics that gathers investment fundamentals into a simple rating – gives only one industrial REIT a "bullish" rating today.

Two other REITs are rated "bearish" right now. And the rest of the companies in the space are stuck in "neutral."

So today, let's use the Power Gauge to dig deeper – and see what's really happening in this part of the market...

Industrial REITs seem to be breaking the laws of economics. But that doesn't mean this situation will last forever. And for investors, an opportunity could be brewing...

First, warehouse rents are rising...

According to data from commercial real estate services firm Cushman & Wakefield, rents jumped 16% year over year in the second quarter. They're up 50% since the spring of 2020.

At the same time, demand is really softening...

Cushman & Wakefield's data showed that warehouse vacancy rates rose from 3% in late 2022 to a little more than 4% in the second quarter of this year. And newly leased space fell 36% in the second quarter.

But we need to consider the big picture.

Sure, demand for warehouse space is currently hitting a soft patch. But overall, demand is still higher than before the COVID-19 pandemic. In early 2020, the vacancy rate was 5%.

The type of demand is shifting, too...

E-commerce demand has come down from the sizzling pandemic pace. People are out and about again. And higher inflation and interest rates have caused some weakening as well.

But a new source of demand is emerging. Specifically, more manufacturers are coming into (or returning to) the U.S. And in the coming months and years, they're going to need a lot of warehouse space.

As a result, rising vacancy rates are likely temporary. When it comes to warehouse demand, the long-term prospects remain favorable.

Warehouse customers know that. They want three- to five-year contracts. They don't want to wind up emptyhanded when the "spot" rents eventually rise.

Supply is tilting toward more advanced, automation-enabled warehouses as well. Modern logistics providers need these types of facilities... And these places command premium rents.

Ultimately, warehouse-rental trends are looking past the current demand dilemma. And they're still progressing toward a more positive long-term future.

That's an encouraging sign for the U.S. economy as a whole.

We're talking about the "boots on the ground" perspective. Warehouses and related companies know they need to have space and services available when merchants need it. They know what's going on long before the official data reflects it.

But for investors like us, this space isn't a buying opportunity... at least, not yet.

The Power Gauge's Power Bar ratio tells us all we need to know. Take a look...

That's the Power Gauge's breakdown of the 11 industrial REITs it tracks. And as you can see, it's not a pretty picture...

This industry is mostly in a "wait and see" mode. It's full of "neutral" ratings right now.

But here's the deal...

This trend could soon change in our favor.

You see, the Industrial Select Sector SPDR Fund (XLI) has one of the strongest sector-level Power Bar ratios today. This exchange-traded fund currently holds 29 stocks with "bullish" or better rankings. And only seven positions rank "bearish" or worse.

In the end, that's good enough for a "bullish" rating from the Power Gauge.

Put simply, industrials are still burning hot – even if industrial REITs are acting funny. And since the long-term future for this industry remains bright, it's worth keeping an eye on.

Good investing,

Marc Gerstein

Editor's note: We're in a stock-picker's market. That's why the founder of Chaikin Analytics is stepping forward with an important update on this rally. He shares his take on the health of the bull market... and reveals how one signal would have warned investors of this year's bank failures before they happened. Plus, he shares a strategy that could position you for quick gains – even if volatility continues in September.

This presentation goes offline at midnight... So make sure you get the full story here.

Further Reading

"In the case of housing, the age-old case of supply versus demand has won out," Brett Eversole says. Everyone expected a housing crash last year. But the shortage of homes on the market is keeping prices high. Two key metrics show just how huge that imbalance is... Learn more here.

Stocks have entered a bull market – but not every sector is thriving. One group of stocks took a hit earlier this year. And right now, the Power Gauge tells us this beaten-down space isn't likely to turn around anytime soon... Read more here.