By Jim Costello on August 30th, 2019
Industrial property prices have grown faster than inflation across the Americas over the last three quarters. This sort of coordinated growth for industrial prices does not happen often.
One might think that to understand industrial property trends in the Americas, one could simply look at the economies of each country and sort of follow along with the biggest market in the Americas: the U.S. One could do that, but one would miss a lot as well, since real estate cycles are not always in tune with economic cycles.
Make no mistake, the economies of Canada, the U.S. and Mexico are closely connected thanks, in part, to the trade links through the USMCA (the trade agreement formerly known as NAFTA). Brazil is not part of this trade area, but with the U.S. as both the second largest source of both imports and exports for Brazil, economic activity is tied in these two countries.
Even though GDP growth is highly correlated between these countries, growth in industrial property prices is not. Mexico, for instance, recovered from the downswing tied to the Global Financial Crisis later than other USMCA countries, but when it did recover, posted sizeable double-digit growth. The growth in Mexico was not as much about economic drivers at the time, rather, the introduction of real estate investment trusts (Fibras) broke down barriers to commercial property investment there.
Measuring prices consistently across countries can be a challenge. There are different rates of inflation, different currency values and problems with price swings due to variation in the characteristics and locations of assets that transact. Of those three problems, Real Capital Analytics can overcome the third one using the RCA Hedonic Series, which controls for quality differences through a chained hedonic model.
As for the broader macroeconomic issues, the growth shown in the chart is for industrial property price per square foot in local currencies. Not just growth in local currencies though, but the growth after the general rate of inflation is stripped out to make the trends in the higher-inflation countries of Brazil and Mexico comparable to that of the low-inflation countries of the U.S. and Canada.
Across the 11 years of data we have, industrial property prices have all been growing at the same time in only eight quarters. The previous winning stretch was in the first half of 2014; price growth in Brazil was anemic then and soon slipped to outright declines.
If the current period of price growth across the four markets is to continue, the burden will fall largely the shoulders of Mexico and Brazil. Industrial property prices have been growing in Mexico over the last three quarters, but when stripping out the inflationary trend from the economy, prices were up only 0.3% YOY in the second quarter.
Brazil still has stronger price growth than Mexico, but the pace of growth has been decelerating rapidly from highs late in 2018. If the pace of deceleration continues, prices might slide in Brazil within two to three quarters.
The RCA Hedonic Series, introduced July 2019, measure yields and price per unit for a extensive selection of markets and countries. To find out more, contact us.
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