Here at Axia Partners we pride ourselves on keeping a finger on the pulse of the latest developments in the worlds of commercial real estate, finance, and economics in order to make informed decisions and stay ahead of emerging trends. In our ongoing quest to bring transparency and value to our investors, I would like to share some of the topics and stories shaping the commercial real estate investing landscape and to provide commentary on how I interpret this information.
With Axia Partners’ successful closing this past week on the construction debt financing for our multi-tenant Axia Business Park warehouse development project, the outlook for industrial asset performance is on the top of my mind. Coincidentally, CoStar Analytics recently released two separate reports pertaining to industrial property rent growth and the dramatic fall in industrial construction starts. These reports are each insightful on a standalone basis but taken together they paint a bullish picture for the industrial market overall, and particularly for assets in Salt Lake City. The report on western US industrial market outperformance points to Phoenix, Las Vegas, and Salt Lake City having achieved double-digit annual rent growth as of Q2 2023 due to similar demand, location, and demographic dynamics. Salt Lake City’s nearly 15% growth in industrial rents can be attributed to its geography (logistics hub), its relatively affordable rents, its “robust demographic profile”, and its positioning as a top 15 metro area in terms of advanced manufacturing employment. Furthermore, while Salt Lake City has seen its fair share of new industrial development, the 7.5 million square feet under construction represents only 4.1% of the existing stock, which is significantly below the share seen in many other markets. Turning to the second report on the decline in US industrial construction starts, it is clear the chaos wrought by the Federal Reserve’s ham fisted attempt to reign in inflation has begun to materially affect development of much needed industrial properties. If trends continue, we are on pace for the lowest level of industrial construction starts in the third quarter since 2013. Complicating matters further is the fact completion timelines for industrial projects are becoming increasingly protracted, averaging 14 months or 15% longer than is typical. As industrial construction starts slow and project take longer to exit the pipeline, we are being set up for a significant supply/demand imbalance towards the second half of 2024 into 2025. If the kink in the development pipeline translates to a severe unmet demand for new space, this could serve as a catalyst to increased rent growth and asset performance among those few properties able to enter the market at that time.
High Level Take-Away: Western US industrial markets, particularly Salt Lake City, have experienced double-digit annual rent growth as of Q2 2023. Salt Lake’s nearly 15% growth in rent for warehouse and logistics properties can be attributed to factors such as geography, economic profile, and robust demographics – all factors expected to remain in play for the foreseeable future. Additionally, industrial construction starts are declining rapidly across the US as demand shows little sign of abating at a similar pace. This dynamic should position properties entering a supply constrained market, such as our Axia Business Park warehouse project, to perform well in H2 2024 and 2025.
In terms of headline economic news eliciting a collective eye roll from second-level thinkers out in the wild, last week the U.S. Labor Department gifted us some wildly misleading jobs numbers for September. Fortunately, the oft irate, rarely mistaken David Stockman delivered a concise criticism of exactly why the jobs figure is dubious and what the data really tells us. The headline number of 336,000 seasonally adjusted jobs added in September nearly doubled what economists were expecting. Such an unexpectedly strong jobs reading should be interpreted as good news and an indication the US labor market and economy remain strong and able to withstand any imminent recessionary forces, right? Wrong. First, the vast majority of these 336k jobs came from either the Government or Leisure & Hospitality – two labor sectors that contribute little to overall wage growth and productivity and are rife with part-time or temporary positions. Second and related, if one examines the index of private sector aggregate labor hours, which is a much more accurate reading of gross wage growth and economic output, from January through September of 2023 we find an annualized growth rate of just 0.3%. This figure is paltry compared to the 0.73% annualized rate the US has experienced since 2000, and is downright embarrassing compared to the 1964 to 2000 rate of 2.0%. Third, when removing the seasonal adjustment factors August to September private payrolls were down by -400k while the government sector ballooned by 948k jobs. The validity of the seasonal adjustment “science” is a separate conversation, but the takeaway here is that the productivity–generating private sector labor market is much weaker than advertised.
High Level Take-Away: The jobs report for September was a wolf in sheep’s clothing. The 336k jobs added were mostly either low productivity Government sector jobs or part-time, lower wage Leisure & Hospitality positions. The index of aggregate weekly hours of production and nonsupervisory employees provides a purer read on the health of US labor output, and unfortunately at present the index’s growth is a rounding error away from being flat. The silver lining here is that the Fed seems to have much less justification for any further interest rate hikes than strong jobs headlines would suggest.
David Jangro
Portfolio Manager - Director of Investment
After receiving his undergraduate degree from Dartmouth College, David structured and traded Mortgage Backed Securities and other financial instruments in EverBank’s Portfolio Management and Capital Market’s groups. David went on to receive an MBA from Vanderbilt University after which he worked as an Advisor for Credit Suisse and then Goldman Sachs. Wanting to work with larger institutional clients, David transitioned into a key role on Goldman’s Hedge Fund Strategies team. Prior to joining Axia, David sought to enhance his commercial real estate exposure by partnering with one of Colliers International’s top Investment Sales teams in the Utah market. As Axia’s Director of Investment and Portfolio Manager, David spearheads the group’s efforts around acquisitions and dispositions, portfolio construction and management, investment strategy, market/industry research, capital markets activities, and thought leadership.
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