ERI's Paul Coelho says a potential labor shortage under the Trump administration could hinder industrial assets.
Industrial managers began wringing their hands about the potential impact of increased tariffs on US imports even before Donald Trump was elected to a second term as president.
While inflationary pressures could pose a headwind for all real estate sectors next year, the industrial class is seen to be among the most vulnerable. But Paul Coelho, managing partner at Boston-based manager Equity Resource Investments, believes the incoming administration's proposals surrounding immigration could prove to be a bigger obstacle.
"Just as important as the trade policy, and perhaps a bigger concern, is what happens with the US immigration policy moving forward and the impact that policy has on this country's employment base," he said.
Coelho estimates that the US manufacturing sector could grow by roughly 3 million jobs by the end of the decade, an increase of 23 percent. Those added jobs, he said, will have a multiplier effect up and down the supply chain, with an additional five to seven jobs for each manufacturing position created.
"As a country, our population is not growing fast enough to fill all these jobs," Coelho said.
A labor shortage caused by tighter immigration policy - or the deportation of a significant portion of what the Pew Research Center estimates to be 11 million undocumented immigrants living in the country - could constrain industrial tenants. Immigrants, both documented and undocumented, account for 25 percent of US construction workers, according to Pew, and 19 percent of manufacturing jobs. Insufficient labor could hinder demand for industrial space or inhibit its growth, which would in turn affect returns for managers targeting the sector.
While mass deportations could upend the industrial sector, Coelho acknowledged that details regarding the Trump administration's policies remain unclear, and could "materially change" from the narrative provided on the campaign trail.
On a brighter note, Coelho said he feels encouraged by the industrial sector's resiliency over the past years, noting that its performance remained strong through similar policies implemented during Trump's first term, which were largely maintained during the subsequent Joe Biden administration.
"Nearshoring and onshoring began in earnest during Trump's first administration's trade policy and the tariffs that were imposed at that time," said Coelho, adding that onshoring and nearshoring trends have continued since. "The higher tariffs on many inputs and outputs that were imposed during Trump's first administration were then maintained and/or increased by the Biden administration.
"The industrial sector didn't really slow down much as a function of those tariffs; it was other factors, including the Fed's fiscal policy and tightening of interest rates and investment in manufacturing under Biden's CHIPS Act, as well as the Inflation Reduction Act, that had more negative and positive impacts, respectively, on the growth of that sector."
Despite the risks, Coelho is generally optimistic for the industrial sector's continued prominence in investment portfolios next year, given the supply/demand imbalances that are expected to continue for the foreseeable future. He also believes the external forces that have hurt the real estate sector generally over the past five years are beginning to stabilize.
"If you have a longer view of the world and if you're willing to take on certain risks such as execution, vintage and market, then I believe there could be some good buying opportunities in the near term across affordable housing, workforce housing and value-add industrial strategies," he said. "The fundamentals of each of these asset types continue to be strong."