The Industrial Sector

2025 Global Investment Outlook: Industrial

Embedded NOI Growth Despite Some Moderating Fundamentals

The Industrial Sector

Industrial absorption exploded during the pandemic, and high levels of tenant demand persisted for several years. This phenomenon started in the U.S., but quickly found its way to the U.K., then to continental Europe, and finally to Asia and other countries such as Canada and Brazil. Watching these trends take place in succession was truly a textbook case of global pattern recognition. The fundamental drivers that kick-started that wave of demand are well past their peak, even if they continue to have influence into the near future.

Key Takeaway: The Industrial Sector

In the U.S. we've seen a moderation in demand and rent growth from what were unsustainable highs.

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In the U.S., we’ve seen a moderation in demand and rent growth from what were unsustainable highs. Like the initial uptick, this slowing started in the U.S., spilled over to the U.K., and has found its way into Europe and Asia more recently. Despite the softening in fundamentals, capital markets have remain enamored with the industrial sector. As such, the sector remains fairly if not fully priced. This is particularly true for assets with short-term rollover of seasoned leases where buyers can underwrite large NOI gains on expiring leases given the accrued market rent growth that has occurred since the lease was signed. By way of example, consider the chart below, which illustrates a five-year Sydney industrial lease with CPI-based annual rent increases that reset to market every five years.

Industrial Market Rent Growth Has Created Embedded NOI Growth

Sources: JLL and Hines Research. As of Q3 2024. [Orange line: 3% fixed annual rent increases that reset to market every five years//Blue line: Market rent]

Learn more about potential opportunities on the horizon in the industrial sector.


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Disclaimer


The content herein and in the report is provided for informational purposes only. Nothing above or in the report constitutes investment, legal, or tax advice or recommendations. Such content should not be relied upon as a basis for making an investment decision and is not an offer of advisory services or an offer to invest in any product or asset class. It should not be assumed that any investment in an asset class described herein will be profitable. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice. Opinions or beliefs expressed in these materials may differ or be contrary to opinions expressed by others. Certain information above and in the report has been obtained from third-party sources. Hines has not independently verified such information.


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