This article is republished with permission from REITCafe.
Industrial real estate investment trusts (REITs) recently hit their second-highest year-to-date return for 2016 at 24.98 percent. While industry professionals have raised concerns that supply and demand issues may plague the next 12 to 24 months, the industrial sector has been noticeably active as it has posted high aggregate occupancy and low delinquency rates. Karina Estrella, an analyst at Trepp, reports that average occupancy rates for CMBS-backed industrial properties have increased annually over the past five years, from 91.9 percent in 2011 to 95.7 percent for 2016. The positive trend continued this month as the industrial sector held the highest average occupancy rate among major property types at 95.8 percent. It also posted the second-lowest delinquency rate in November at 3.65 percent, runner-up to only the multifamily sector at 2.52 percent.
Multiple factors play into the success of the industrial sector. Of greatest importance, changing trends in consumption methods have driven demand. The e-commerce boom may be handcuffing brick-and-mortar properties, but it creates demand for spaces such as warehouses and distribution centers. Prologis, the largest industrial REIT in the nation, has dedicated 30 percent of its new development activity to e-commerce. The firm’s new development total is heavy on metropolitan areas, where competition is pushing companies to deliver goods in hours as opposed to days. Chris Sheehan at Colliers International comments that “demand is the biggest challenge, and the lack of inventory is significantly pushing rents in a very short amount of time. Coupled with cap rate compression, industrial development opportunities are at all-time highs.”
Historically, import volumes have the highest correlations to demand for industrial space. Hamid Moghadam, chief executive officer of Prologis, argued against fears regarding a potential decline of international trade: “I know there’s a lot of talk about pressures on trade . . . but trade is not going away, let’s not kid ourselves, and we’re part of a very important global economy.” He also stated that “the rhetoric is exciting. I don’t know how the math is all going to work between cutting taxes and infrastructure spending and the like. If the economy can really grow at 2.5 to 3 percent, I think that would be really exciting for our business.”
For a growing and consuming economy, industrial properties are poised for continued success.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 12/2/2016.