08/17/2012 | by
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Industrial Sector in Sync With Manufacturing

Industrial REITs appear prepared to handle the current fluctuations in the manufacturing sector, as well as to capitalize on the projected recovery in the future, according to Calvin Schnure, vice president of research and industry information with NAREIT.

Manufacturing output rose a half percentage point in July, according to the latest data from the Federal Reserve. Schnure noted that the increase comes on the heels of a period of volatility, making for "choppy" moves in a "modest" recovery. In the last year, manufacturing output is up 5 percent in the past year, but remains below its level during the peak of the last economic upswing.

Auto manufacturing has helped provide a tailwind behind the manufacturing industry in the United States, Schnure said.

Now, however, the economic signs point to a slowdown in manufacturing, according to Schnure. The expectations for manufacturing demand going forward have hit a "no man's land" filled with uncertainty, Schnure said.

"We've seen the global economy slow down in the spring, in part because of the debt troubles in Europe," he said. "Lately, we've had some concern about the U.S. fiscal cliff, and the manufacturing sector is not immune to the macroeconomic trends."

Schnure downplayed concerns about the health of the industry, though.

"I'd be a little bit more concerned about this if the fundamentals weren't reasonably solid," he said. "Manufacturing can be vulnerable if production levels have been high and you've got high levels of inventory."

Yet, the latest data show manufacturing inventories are currently in line with sales, Schnure noted.

"There's no overhang that would cause problems for the firms, so they're not going to have to cut back production sharply," he said.

In general, Schnure described the manufacturing market fundamentals as "reasonably stable." Capacity utilization is roughly in sync with its long-term average.

"Further increases in production are going to need further investment, further purchases of equipment, further capital spending," he said. "These are the types of business activity that cause self-reinforcing, virtuous cycles in the macroeconomy."

Industrial REITs have experienced a slight slowdown since the start of the year, including decelerating rent growth. The sector's development pipeline is building, though.

"If you have modest re-acceleration of the economy next year as we expect, then this new development is going to be perfectly in line, and it's not going to cause any overhang," Schnure said. "It's consistent with good growth in the sector in 2013 and 2014."

Schnure pointed out that if exogenous factors such as the economic situation in Europe further dampen economic growth in the U.S., they would impact the sector's prospects.