What's Brewing for Industrial REITs This Earnings Season?
The rising interest rate environment and competition from other bond-like products are undoubtedly creating hiccups for the U.S. REIT industry and affecting its returns. However, fundamentals of the underlying asset categories are still playing a crucial role in determining their performance.
Particularly, the industrial real estate market is grabbing attention amid improving economy and job-market gains, strengthening e-commerce market and high consumption levels. Demand for warehouses, distribution centers and other industrial property remains strong, and continues to surpass supply levels.
In fact, per a study by the commercial real estate services firm — CBRE Group Inc. CBRE — availability fell for 33 straight quarters to 7.1% for the U.S. industrial real estate market in the Jul-Sep quarter. Notably, this denotes the lowest level since 2000.
In order to support e-commerce business, address a large customer base and urbanization, companies are now required to improve, develop and renovate their distribution and production platforms. Services like same-day delivery are gaining traction, propelling demand for modern distribution facilities. Also, last-mile properties are witnessing a solid increase in asset values.
In fact, for a given level of revenues, online retailers require three times the distribution-center space compared with traditional retailers, according to a report from Prologis Inc. PLD. This, in turn, is definitely spurring demand for industrial space.
As such, across the 55 markets tracked by CBRE, net absorption amounted to 63 million square feet in the third quarter. This surpassed the construction completions of around 50 million square feet. Encouragingly, over the past year, demand has outdone supply by 34 million square feet.
Going forward, with a recovering economy and job-market gains, as well as tax reforms, consumption levels are anticipated to remain elevated. And with a healthy manufacturing environment and high business inventories, demand for warehouse and logistics real estate is anticipated to be high. This, again, will provide significant impetus to REITs in the industrial asset category, such as Prologis, Duke Realty DRE, Liberty Property Trust LPT, in the form of rent escalation, apart from high occupancy.
Nevertheless, a whole lot of new buildings are slated to be completed and made available in the market in the upcoming quarters, leading to a narrowing of the demand-supply gap and thereby, raising chances of a somewhat curbing of the pricing power of industrial real estate landlords.
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