As the third quarter of 2018 comes to a close, all signs point to another strong quarter for industrial real estate. Essential indicators for industrial demand remain high, including distribution industry job growth. In September 2018, the three industries directly related to industrial real estate hit all-time highs for total employed in the U.S., including truck transportation (1.48 million), couriers and messengers (756,600) and warehousing and storage (1.05 million). These industries reached new peaks because of the continued growth in e-commerce sales in the U.S. Online sales finished Q2 2018 — the most recent data available — at $120.4 billion in the U.S., a 15.4% increase compared with Q2 2017. For the year, e-commerce sales represented 10.8% of non-auto related retail sales.

Rail traffic across the U.S. continues to post strong fundamentals, with total rail traffic up 5% year to date. Seaports continue to boom with loaded inbound and outbound container volumes all posting solid numbers with loaded inbound container volumes up 5.4% compared with the same time a year ago. The U.S. manufacturing industry also remains in expansion territory with the Purchasing Managers Index (PMI) at 59.8% in September. This represents the 25th consecutive month that this manufacturing measurement has been in growth territory.

Last week, Canada struck a deal to join Mexico and the United States in renewing the former North American Free Trade Agreement (NAFTA). The new trade agreement also has a new name, the United States Mexico and Canada Agreement (USMCA). While the trade deal has a new name, much of the old NAFTA remains the same, and the deal still must be ratified by the three nations.

Nonetheless, the USMCA does blunt a potential headwind for industrial real estate demand in 2019 by avoiding disruptions to major supply chain routes between the United States and Canada/Mexico if the trade deal had been nullified. With downstream impacts on manufacturing production and domestic freight transportation, there are a few of the deal’s highlights that could impact industrial real estate demand.

Automobile Manufacturing

The major addition to the new trade pact is the agreement that starting in 2020, to qualify for zero tariffs, a car must have 75% of its components manufactured in North America. Currently this requirement is only 62.5%. This could help industrial real estate with a manufacturing component as well as distribution centers carrying automobile related products in the long run, though it will take time for foreign automakers to adjust supply chains, and could potentially push some manufacturing offshore, particularly where the supply chains for specialized inputs cannot be easily adjusted to domestic producers. Mexico could see the greatest gains in auto-related manufacturing because of lower labor costs (even with the agreement of a $16-per-hour minimum wage for 40% of the vehicle’s value) and fewer regulations. But the continued free transportation of automobile components across borders along with the potential for foreign automobile companies to expand production still should benefit U.S. industrial real estate, especially in mature manufacturing markets in the Southeast and Midwest.

Intellectual Property

The USMCA contains stricter intellectual property rules. Intellectual property protection already is much stronger in Mexico and Canada compared with China, who remains a major culprit, but further shoring up these rules could induce more North American manufacturers to reshore, particularly when combined with increased costs from distributing out of China because of higher labor rates, higher shipping costs, and most importantly recent tariffs placed on Chinese imports. In turn, this could increase both manufacturing output and industrial property demand in regions that have the qualified labor to take over this manufacturing. An increase in domestic freight transportation from more U.S. manufacturing could increase demand for distribution space in inland port markets as well. However, if reshoring from Asia increases, look for imports, especially along west coast ports, to potentially decline, leading to lower demand for industrial space in nearby markets.

What About China?

Overall, the projected growth of e-commerce along with current external indicators forecast industrial real estate growth in the near-term. While automotive-related distribution centers and processing facilities could benefit the most from the new trade deal, the shoring up of free trade with our North American neighbors is another incentive to reshore. While the USMCA is welcome news, the major headwind that still remains is the brewing trade war between the United States and China.

Any growth in manufacturing from the USMCA could be mitigated or even overtaken by increased Chinese tariffs on products manufactured in the U.S. This could shift some foreign automaker manufacturing away from the U.S. and into Asia. Also, overall manufacturing in the U.S. could be hit by a decrease in demand for American-made goods in China, one of the top importers of our products. Finally, while the impact on industrial real estate is still too early to tell, increased prices from tariffs could weigh on retail sales in the coming year, so U.S. seaport volume and corresponding demand for distribution centers could also diminish.