The CHIPS Act and its (Positive) Implications on a Strong Industrial Sector
By Fort Editorial Staff
On August 16th it was announced that Texas Instruments (TI) and the U.S. Department of Commerce have reached a preliminary agreement for TI to receive $1.6 billion in grants in direct funding through the CHIPS Act to support the continuing construction of warehouses suited for the development and distribution of semiconductors.[i] The CHIPS Act (Creating Helpful Incentives to Produce Semiconductors and Sciences Act) aims to boost semiconductor manufacturing in the U.S. by providing substantial funding and incentives for manufacturing companies to bring the development of these “chips” onto U.S. Soil. This has significant implications for the industrial real estate sector.
While we are not involved in the manufacturing of these buildings, the continued funding through the CHIPS Act offers significant signals of solid growth throughout our industry and reaffirms our belief in our investment outlook. The strengthening U.S. industrial sector is good for all who partake (“a rising tide lifts all boats”). Provided below is our general outlook on various indicators of a steadily increasing industrial sector.
Increased Demand for Industrial Space
The demand for industrial space has surged significantly as of late, in some cases based on cash flow resulting from the CHIPS Act, but also on a larger scale based on occupancy rates, manufacturing increases, and an increasing interest in onshoring and nearshoring production. Recent data from the National Association of Industrial and Office Properties (NAIOP) reveals that demand for industrial space in the U.S. has continued to be high. In the first half of 2024, industrial space availability rate was measured at 7.1%, a strong signal for the industrial sector as a whole.[ii]
The CHIPS Act’s funding for semiconductor facilities further supports this trend, indicating that industrial real estate will continue to be a hot commodity as companies ramp up production capabilities. The manufacturing of new facilities does not necessarily indicate a broad-range increase in supply, however, as most of the new builds are tailored for whatever industry, manufacturer, or company is entering that new space, preventing a mass dilution of rental rates across the sector as a whole and keeping us in a strong position in the near and much further future outlooks. Property values and rental rates should remain strong, given the high demand triggered by the need for increased supply chain assets and steadily increasing onshore manufacturing initiatives. Our assets and ability to “make-ready” existing builds put us in a prime position to continue our efforts and further grow within the industry.
Rental Rates in our Target Markets
An increased demand for space is not the only strong indicator we see represented in recent industrial market data. According to CBRE’s Q2 2024 U.S. Industrial MarketView report, average asking rents for industrial spaces have seen a substantial increase in some of our targeted markets — including Tampa (20.5%), Dallas-Fort Worth (17.8%), and Houston (15.5%) — driven by continued strong demand for logistics and distribution facilities.[iii] The strong rental data we are seeing bodes well for future cash flow as we hold an interest in leasing and property management of our assets.
Property Value Appreciation
Unlike some of the other asset types in real estate, industrial has remained an extremely encouraging sector, owed in large part to the barriers of entry to manufacturing builds on large plots of land coupled with the increased demand for spaces by growing industries. In fact, according to Real Capital Analytics, the industrial sector saw a price increase of 8.7% in the last 12 months.[iv] This appreciation is fueled by strong investor interest and the increasing demand for industrial spaces, particularly those related to advanced manufacturing and technology.
A quirk of our industry is that although manufacturing of new builds has increased nationwide, the industrial sector is challenging to physically expand. With a limited number of landing locations for manufacturers, shippers, producers, business owners, and supply chain members (etc.), the industrial sector has become an extremely attractive asset class. An appreciation in value is only natural when coupled with the increasing demand, but those with the capital to take advantage of this are seeing the fruits of their labor and counting their multiples.
Investment Returns
CoStar reports that industrial real estate investments have delivered average annual total returns of 10.9% since 2000 (as of 12/31/2023), beating equity markets over the same time-period (with significantly less volatility).[v] While our investment structure is not as liquid or accessible as our equity competitors, the asset returns have shown greater upside in the past two decades. This strong performance underscores our sector’s attractiveness and generally positive outlook for investors. With continued cash flow and increasing demand for builds, industrial acquisition, leases, and management remain attractive investment opportunities and endeavors we will gladly continue pursuing.
Final Thoughts
The combination of an increased demand of industrial spaces and a rental rate increase in our specified target markets serves to emphasize the strength of our growing sector and our advantageous place within it. The increasing property valuations and the historical investment returns for our industry are encouraging indicators that we will continue to thrive. The CHIPS Act’s substantial funding for semiconductor facilities not only signals a significant boost for the industry but also highlights the critical role of industrial spaces in supporting advanced manufacturing and technology initiatives. Our strategic focus on acquisitions, leases, and property management aligns well with these positive market trends and we contest that our continuous efforts will allow us to take capitalize on the industry’s growth.
[i] Reuters “Chipmaker Texas Instruments to receive up to $1.6 bln in funding from US,” August 16, 2024.
[ii] National Association of Industrial and Office Properties (NAIOP), “Industrial Space Demand Report,” H1 2024.
[iii] CBRE, “U.S. Industrial MarketView Report,” Q2 2024.
[iv] Capital Trends, US Industrial, MSCI Real Capital Analytics, May 2024.
Data as of 07/16/24.
[v] CoStar, Data as of 08/20/2023.
Disclosure: Fort’s investment strategy includes a focus on industrial real estate sectors. Past performance is not indicative of future results. Market conditions and investment outcomes can fluctuate based on various factors, including economic changes, market trends, and unforeseen events. All investments carry risks, including the potential loss of principal. For more information about Fort’s investment strategies, financial performance, or to obtain copies of our financial statements and disclosures, please visit our website or contact our investor relations department.