Rising Interest Rates Could Cool Industrial Investment, Executives Say
Rising interest rates could pinch freight carriers and put industrial real-estate transactions on pause, executives say, but tighter policy might help if it succeeds in slowing the inflation that is driving up the cost of projects.
“If there’s any one sector that really needs inflation to get under better control, it is the industrial sector,” said
chief economist at real-estate services firm
The Federal Reserve on Wednesday announced it would raise interest rates by 0.75 percentage point and Fed Chairman
said the central bank could follow the largest interest rate increase since 1994 with more rapid hikes this year.
head of global banking at U.S. Bank, oversees its supply-chain finance business. He said the rising financing costs will also raise inventory carrying costs, adding to stresses in supply chains—if companies carry less inventory to tamp down costs.
“When interest rates go up, then there’s a correlation that inventories actually go down” when companies can’t pass along those higher costs to their customers, he said.
Inventory costs were already elevated as retailers and manufacturers sought to bring in goods to refill depleted stocks as supply-chain logjams tied up orders on the water and at congested ports. The Logistics Managers’ Index, a monthly survey of supply-chain managers, showed inventory costs about 33% higher in May than they were in the same month in 2020.
The higher rates will also raise borrowing costs for logistics operators and carriers and could lead some industrial real-estate investors to put off decisions on new construction, executives said.
The increased cost of money could have a big impact on lightly-capitalized trucking companies that operate on thin margins, said
vice president of global sales and marketing at freight-payment company
“You could actually end up with a reduction on available trucks down the road if you start to lose a lot of carriers,” Mr. Carlson said.
The tighter money policy comes as freight carriers are already wrestling with higher fuel prices, adding costs that smaller operators have trouble passing along to customers.
executive vice president and head of the industrial services group in North America at real-estate service provider
PLC, said higher financing costs could also cool investor interest in what recently has been a red-hot market for industrial real estate.
Mr. Healy, who is based in Southern California, said he is not seeing warehouses change hands in some parts of the region even as overall distribution space remains tight.
“There’s a pause because you have investment groups which are looking at their own debt stack, and they’re saying, ‘OK, what are opportunities for reward here? What’s the risk that might be out there as well going forward?’” Mr. Healy said.
The rate hike will also affect calculations on real-estate projects, said
chief economist at the Associated General Contractors of America, a trade group representing builders. Higher borrowing costs mean some projects such as warehouses will “no longer pencil out,” Mr. Simonson said. Financing costs “along with rapidly rising construction materials and labor costs will outrun the potential rental income,” he added.
But the fallout on infrastructure projects such as highway construction will be generally minor, he said, since much of their financial backing comes from state and federal funding.
“Many types of construction are relatively insensitive to this increase: infrastructure and long-lived manufacturing and power projects, for instance,” Mr. Simonson said.
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