If the high chances of a rate hike in March have made investors jittery about their investments in the REIT industry, then this is the right time to think again. This is because individual market dynamics play a key role in determining the performance of REITs, and there are favorable conditions as well as ample chances of growth in some of the asset categories.
Particularly, in the industrial real estate market, demand for space has been high for several quarters. Per a study by the commercial real estate services’ firm – CBRE Group Inc (CBG) –availability fell for 26 straight quarters to 8.2% for the U.S. industrial market in fourth-quarter 2016.
Moreover, according to a report published by Prologis Inc (PLD) earlier in March, rent growth in the industrial sector remained solid globally. In fact, rental rates for global logistics real estate increased 4% in 2016.
Further, the market rent growth in 2016 was led by the U.S., which climbed 5%. Particularly, key coastal markets closer to large consumption centers outperformed all other U.S. markets by over 15 basis points (bps).
Also, in a CEO Spotlight video interview at NAREIT’s 2017 Washington Leadership Forum at The Hay-Adams, DCT Industrial Trust Inc’s (DCT) president and CEO — Philip Hawkins — revealed that the company is gaining from solid demand for distribution space. Furthermore, limited supply helped rents to increase and lease ups to occur at a faster pace.
As a matter of fact, amid economic expansion, e-commerce boom and heightened urbanization, companies are shifting their strategy toward services like same-day delivery and other such options, propelling demand for warehouse distribution facilities.
Further, with a larger customer base, companies are opting for supply-chain consolidation, resulting in greater demand for logistics infrastructure and efficient distribution networks, thus creating scope for industrial REITs like Prologis, DCT Industrial, Duke Realty Corp (DRE) and Liberty Property Trust (LPT) to flourish.
On the other hand, with considerably limited supply, growth in rent has been strong in most industrial markets in recent quarters.
Further, construction of mega industrial houses, spanning 1 million square feet or more, is rampant in large industrial markets, according to another report from CBRE Group. Around 90 million square feet of these mega facilities, which benefit from growing e-commerce business, have been accomplished since 2010 in the top 10 markets; while an additional 31.6 million square feet is under construction, with 60% pre-commitments, displaying solid demand for such facilities.
Against such a favorable backdrop, the industrial sector has climbed great heights, logged in an impressive total return of 30.72% and emerged as the top-performing Equity REIT market segment for 2016. Further in Feb 2017, the sector logged in a return of 4.77%, and considering the improving economy and healthy fundamentals of the industrial sector, this trend is likely to continue.
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