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Fed Hikes Rate Third Time, Industrial REITs Set To Grow

Published 06/25/2017, 09:20 PM
Updated 07/09/2023, 06:31 AM

If the rate hike in June, the third since Dec 2016, has made investors jittery about their investments in the REIT stocks, then this is the apt time to think again. It is because individual market dynamics end up playing a major role in the performance of REITs, and there are favorable conditions, as well as ample chances of growth in some of the asset categories.

For example, take the industrial real estate market where demand for space has been high for several quarters. Admittedly, this asset class is witnessing an improvement in fundamentals amid an economic recovery, growth of e-commerce and U.S.-based manufacturing. This is driving demand for warehouse space as companies are compelled to enhance and renovate their distribution and production platforms.

Particularly, 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. Also, according to a report from Prologis Inc. (NYSE:PLD) , for a given level of revenue, online retailers require three times the distribution center space compared with traditional retailers.

On the other hand, though supply is increasing, market vacancy levels are still lower and amid positive net absorption, rental rates are growing in several markets. This is creating scope for industrial REITs like Prologis, DCT Industrial Trust Inc. (NYSE:DCT) , STAG Industrial, Inc. (NYSE:STAG) and Liberty Property Trust (NYSE:LPT) to flourish.

In fact, during first-quarter 2017, Prologis enjoyed high occupancy levels. Demand for the company’s facilities was propelled by growth in the housing, construction and e-commerce businesses. Moreover, market conditions in Europe continued to improve.

Additionally, in a recent video interview at REITWeek 2017: NAREIT’s Investor Forum at the New York Hilton Midtown, DCT Industrial’s CEO, Phil Hawkins, said that “Demand is really as positive as people read about”. He noted that solid demand for space has been indicating consistent growth in rent in the industrial sector, while supply of space, according to him, is “rational.”

Further, STAG Industrial’s CEO – Ben Butcher – joined REIT.com for a video interview at REITWeek 2017 and stated that the company’s pace of acquisition is likely to accelerate. It has already purchased 11 properties in the first quarter and targets acquisition of around 25 properties in the second quarter.

Also, Liberty Property’s industrial portfolio, spanning 91.7 million square feet, was leased 96.6% at the end of first-quarter 2017. Further, industrial distribution rents escalated 17.8% on renewal and replacement leases during the quarter.

Against such a favorable backdrop, in first-quarter 2017, the overall U.S. industrial real estate market remained upbeat despite increased supply. In fact, per a NAREIT media release, Industrial REITs delivered solid same-store NOI growth of 5.9% in the first quarter. Considering the improving economy and healthy fundamentals of the industrial sector, this trend is likely to continue.


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ProLogis, Inc. (PLD): Free Stock Analysis Report

Stag Industrial, Inc. (STAG): Free Stock Analysis Report

DCT Industrial Trust Inc (DCT): Free Stock Analysis Report

Liberty Property Trust (LPT): Free Stock Analysis Report

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