After years of decline at the hands of low cost wages in the emerging world, it's hard to believe the United States is in the midst of manufacturing revival. Driven by low input costs, mostly stemming from our abundance of natural gas, manufacturing across the nation continues to increase. These input costs are getting so low, that many firms are realizing that the total cost of doing business is cheaper in the U.S. Ultimately, corporations are reopening factories they previously closed and opting to open new plants across the nation.
Analysts predict that this trend of on-shoring or re-shoring isn't a fad and could mean sweeping investment implications. Aside from the obvious plays in industrial funds like the First Trust Industrial/Producer AlphaDEX ETF (ARCA:FXR), industrial real estate is poised to see great gains as on-shoring continues to take hold.
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A Stable Trend
In the past, cheap labor and shipping costs gave various emerging market nations a distinct advantage when it came to manufacturing. However, with wages rapidly rising in traditional manufacturing hubs like China, and crude oil prices following suit, industrial production in the U.S. seems to have gotten its mojo back. Manufacturing wages in the Asian dragon are expected to rise 15% this year and is quickly approaching $3 an hour mark for the average worker, compared to just 58 cents an hour back in 2001. At the same time, analysts at Jones Lang LaSalle (NYSE:JLL) estimate that transportation costs will rise 20 to 25% over the next three years.
Weighing factors including shipping and labor costs, as well as supply chain efficiency, taxes and economic incentives; companies are now returning to the U.S. in spades. Caterpillar (NYSE:CAT) is in the process of shifting production from Japan back to the U.S, by opening a new 850,000-sq.-ft. facility in Texas. Likewise, Whirlpool (NYSE:WHR) and Ford (NYSE:F) have relocated some jobs back to the U.S. and opted to upgrade U.S. factories, instead of off-shoring operations. Overall, research group Boston Consulting projects that more than $100 billion in manufacturing will return to the U.S.
For the owners and operators of industrial real estate, the return of U.S. manufacturing jobs is certainly a welcome sign. Any boost in related industrial production will boost demand and rental rates for the various REITs that own warehouses, business parks as shipping facilities. Currently, the total industrial market vacancy rate stands at 9.5%. That's down from a recessionary peak of 10.5%. Already rent rates have begun to climb and supply is beginning to be constrained.
SEE: The Basics Of REIT Taxation
Betting On Industrial Real Estate Muscle
While the apartment sector has seen its stars shine due to the housing crisis, the industrial owners may finally have the wind in their sails. A broad measure does exist - the iShares FTSE NAREIT Industrial/Office ETF (ARCA:FNIO) - but it's not the best representation of the industrial sector and has poor trading volumes. The best bets lie within individual firms. Here are a few picks.
Industry giant ProLogis (NYSE:PLD) continues to be the go-ahead play in the sector. With a plethora of industrial assets spanning North America, Asia and Europe, the firm has recently begun a series of asset sales to realign itself with the new onshoring paradigm. ProLogis sold nearly $605 million worth of European assets during the first quarter. Given the giants continued leadership position in the space, investors may want to choose it for a portfolio, rather than competitors like First Industrial (NYSE:FR) or Monmouth (NYSE:MNR). Shares of the firm yield about 3.3%.
Due to the sector's unappealing nature during the economic slowdown, many industrial REITs are paying big dividends. The trio of STAG Industrial (NYSE:STAG), DCT Industrial Trust (NYSE:DCT) and EastGroup (NYSE:EGP) yield roughly 7.7, 4.8 and 4.2 %, respectively, and could be great additions to an income portfolio. Overall, increases in onshoring should help support rental rates and these firm's large dividends.
SEE: Dividend Yield
The Bottom Line
With manufacturing returning to U.S. shores, the industrial real estate sector could finally be turning a corner. For investors, betting on the firms that own warehouses, shipping facilities and business parks, could be a great way to play the onshoring of America. The previous picks, along with Terreno (NYSE:TRNO) are great ways to do just that.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.