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Can Industrial REITs Ride High Amid Supply & Trade Woes?

Moumita C. Chattopadhyay

The industrial real estate asset category has grabbed headlines in a rising e-commerce market and continues to play a pivotal role, transforming the way how consumers shop and receive their goods. Advanced technologies are being employed by Industrial REITs at their logistics centers for achieving efficiency in trans-shipment and delivery process.

Nevertheless, rising supply and the cooling U.S. economy, as well as a slowdown in global growth, together with trade disputes, have raised concerns of late about this industry’s growth prospects.

Let us delve into details and find whether it is worth investing into this sector or keep it on the sidelines.

Industrial Real Estate Fundamentals

Per a study by the commercial real estate services firm — CBRE Group CBRE — the U.S. industrial & logistics sector remained healthy in the second quarter even with potential headwinds. The sector reported an availability rate of 7.1% in the quarter.

Although the availability rate reflects a slight uptick from the prior quarter, net asking rents inched up 0.4% quarter on quarter to $7.50 per square feet — representing the highest level since CBRE started tracking the metric in 1989. Moreover, rents have climbed 6.4% year over year and this also indicates a 2% percentage point above the average annual growth rate since 2012.

Resilient consumer sentiment, low unemployment level and rising wages are playing a key role in the keeping up the healthy performance of the industrial and logistics sector. Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals. With scarcity of developable land near consumers, multi-story logistics facilities are gaining traction.

Furthermore, additional demand for distribution space is coming up as e-commerce continues to expand to sectors like grocery and furniture. Also apart from e-commerce, food & beverage and home improvement companies are helping drive leasing activity.

However, this is fueling construction activity and a whole lot of new buildings are becoming available in the market, leading to higher supply and lesser scope for rent and occupancy growth.

In fact, per the CBRE report, completions surpassed net absorption by 10.7 million square feet in the June-end quarter, based on available square footage. Furthermore, the under-construction pipeline reported 3.6% growth quarter over quarter to 293.2 million square feet. Additionally, any protectionist trade policies will have an adverse impact on economic growth as well as the sector’s business.

Nevertheless, possibility of a rate cut has aggravated recently with the central bank being prepared to "act as appropriate" in order to sustain economic expansion that is challenged by a slowdown in global growth and trade disputes while inflation fails to reach target levels. The lower interest rate is likely to cushion the negatives that the economy is facing from the trade disputes. Also, with no indication for any slowdown in e-commerce industry, demand for space offered by Industrial REITs is likely to remain healthy in the upcoming future.

Stocks to Consider

Duke Realty Corp. DRE is an industrial REIT in the United States, engaged in owning, managing and developing industrial properties across the country. The company has resorted to the sale of sub-urban office assets and medical-office buildings in the past, in a bid to transform itself into a domestic-focused industrial property REIT. The measure augurs well amid favorable market environment in this asset class.

Duke Realty carries a Zacks Rank #2 (Buy). The company’s expected funds from operations (FFO) per share growth for the current year is 6.8%. The Zacks Consensus Estimate for this year has improved 2.2% to $1.42, over the past 90 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PS Business Parks PSB is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant industrial, flex and office space. The REIT is poised to excel as the industrial real estate market is witnessing improving fundamentals amid e-commerce boom and supply-chain strategy transformations.

PS Business Parks carries a Zacks Rank of 2, at present. The company has been a decent performer, with the company exceeding estimates in terms of FFO per share over the trailing four quarters.

Additionally, the company’s Zacks Consensus Estimate for the ongoing year’s FFO per share moved 1.5% north to $6.71 in two months’ time.

Prologis PLD is a leading industrial REIT that acquires, develops, operates and manages industrial properties in the United States and across the globe. This Zacks #3 (Hold) Ranked stock generated a positive surprise of 1.32% in terms of FFO per share, in the second quarter which was backed by high occupancy.

Prologis has agreed to acquire warehouse owner Industrial Property Trust, in a deal valued at about $3.99 billion, from Black Creek Group, a move that will expand the company’s position in key submarkets.

This apart, the company raised its guidance at the mid-point backed by healthy market conditions, solid customer demand and rent growth. The trend in estimate revisions of 2019 FFO per share indicates a favorable outlook for the company and given the progress on fundamentals, there is decent upside potential to the stock.

Here’s how the above stocks have performed so far in the year.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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