Industrials Up, But Pare Gains on Tariff Confusion -- Industrials Roundup

The industrial sector has shown resilience in early 2025, driven by robust demand for warehousing, logistics, and manufacturing space. However, tariff-related uncertainty and its ripple effects on supply chains, construction costs, and corporate strategy are tempering optimism. While companies like TSMC and Apple are plowing billions into U.S. manufacturing, tariff confusion has created a “wait-and-see” environment that is slowing speculative development and moderating lease rate growth.

Market Dynamics: A Sector in Flux

Industrial real estate metrics reveal a mixed picture. Brokerage reports from JLL and CBRE highlight conflicting trends:
- Vacancy Rates: JLL reports a 6.6% vacancy rate in Central Iowa, with over 2.6 million sq. ft. of speculative space unoccupied. CBRE’s slightly lower 6.3% vacancy masks deeper issues, as western suburbs face “record overbuilds” from prior speculative development.
- Leasing Activity: Net absorption slowed sharply (56,137 sq. ft. for CBRE vs. 259,633 sq. ft. for JLL), with companies pausing commitments amid tariff-driven cost volatility.
- Construction Pipeline: Only 55,000 sq. ft. of space is under construction (per JLL), all pre-leased, while CBRE notes 397,000 sq. ft. of ongoing projects—many delayed due to material costs.

Tariff Turbulence: The Elephant in the Boardroom

President Trump’s April 2025 tariff regime—a 10% baseline plus higher rates for trade-deficit nations—has upended global supply chains. Key impacts include:
- Cost Pressures: One-third of construction materials are imported, with half sourced from Canada, Mexico, and China. JLL estimates tariffs have inflated material costs by 15–20%, slowing project timelines.
- Corporate Strategy Shifts:
- Supply Chain Reconfigurations: Rockwell’s CFO Christian Rothe revealed relocating production between U.S. and foreign markets to avoid tariffs.
- Price Increases: Dell Technologies’ COO Jeff Clarke warned tariffs could force consumer price hikes if cost offsets fail.
- Hiring Cautiousness: Mentions of hiring freezes surged 286% QoQ, as firms brace for tariff-driven economic slowdown.

Investment Considerations: Opportunities Amid the Fog

Despite the challenges, select areas show promise:
1. Data Center Growth: Central Iowa’s Cielo Digital and Edged/Cologix are advancing multi-billion-dollar data center projects, leveraging tech infrastructure demand.
2. U.S. Manufacturing Reinvestment:
- TSMC’s $165B Semiconductor Push: Three new Arizona plants and advanced packaging facilities aim to reduce reliance on Asian supply chains.
- Apple’s $500B Four-Year Commitment: Includes a 2026 Houston AI server factory, creating 25,000 jobs.
- Hyundai’s $21B Auto Expansion: Targets 1.2 million U.S.-built vehicles annually by 2028.

Risks and Recession Risks

• Geopolitical Tensions: Retaliatory tariffs (e.g., China’s 125% duties on U.S. goods) and supply chain bottlenecks (e.g., rare earth shortages affecting Tesla) amplify uncertainty.
• Economic Outlook: The Fed now projects 1.7% U.S. GDP growth for 2025—its lowest since 2022—as tariff-driven inflation (3.1% core rate) slows consumer spending.

Conclusion: Navigating the Tariff Crossroads

The industrial sector is caught between two forces: cyclical demand for warehousing and manufacturing space, and structural headwinds from tariff-driven costs and geopolitical volatility. Investors should:
- Focus on Quality Assets: Pre-leased facilities (e.g., Kemin’s Des Moines warehouse) and data centers with long-term contracts offer stability.
- Watch Corporate Agility: Firms like NVIDIA and Abbott that are reshoring strategically—and avoiding tariff-affected supply chains—may outperform.
- Beware the Fed’s Hand: With rates held at 4.25–4.5%, the Fed’s projected two 2025 cuts could ease borrowing costs, but only if inflation moderates.

The NTMA’s advice—strengthen domestic suppliers, invest in automation, and prepare for retaliatory tariffs—summarizes the path forward. While industrials are up, gains will remain capped until trade policies stabilize. In this environment, patience and sector-specific due diligence are critical.