The Hottest (And Most Unlikely) Real Estate Sector

Nov. 30, 2017 6:10 AM ETAMZN, DCT-OLD, EGP, FR, IYR, LPT, BX, STAG, VNQ, PLD19 Comments

Summary

  • The global economy is growing at the fastest rate since the end of the recession. Booming global trade and the rise of e-commerce have boosted demand for warehouse distribution space.
  • Industrial REITs have benefited from the insatiable demand for well-located distribution facilities. Occupancy is near record-highs, rent growth is relentless, and demand indicators suggest that there’s further room to run.
  • E-commerce continues to be the primary demand driver for industrial space. E-commerce requires more 2-3 times more logistics space than traditional brick and mortar, a function of fast delivery requirements.
  • 3Q17 earnings generally exceeded expectations as leasing conditions remain tight and same-store NOI growth continues to be above the REIT average. The robust development pipeline should continue to support growth.
  • Supply growth has heated up and threatens to spoil the party if demand moderates. The infill nature of the high-quality distribution centers does serve as a mild barrier to entry.

REIT Rankings: Industrial

In our REIT Rankings series, we analyze one of the fifteen real estate sectors. We rank REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives. We update these rankings every quarter.

industrial REITs

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Industrial Sector Overview

Industrial real estate assets are critical nodes in the global supply chain. One of the major real estate sectors, industrial REITs, comprise roughly 10% of the REIT Indexes (VNQ and IYR). Within our market value-weighted Industrial index, we track the eight largest industrial REITs, which account for roughly $70 billion in market value: DCT Industrial (DCT), Duke Realty (DRE), EastGroup Properties (EGP), First Industrial (FR), Liberty Property Trust (LPT), Prologis (PLD), PS Business Parks (PSB), and STAG Industrial (STAG). Industrial REITs own roughly 10% of industrial real estate assets in the United States.

industrial REITs

Above we show the size, geographical focus, and quality focus of the eight Industrial REITs we track. There are three primary categories of industrial real estate assets: bulk distribution centers, general warehouse, and flex office/warehouse. The highest-value industrial real estate assets are bulk distribution facilities located near major metropolitan cities. These distribution facilities enable fast delivery of goods to consumers. These "infill" assets tend to have higher barriers to entry as well-located undeveloped land is relatively scarce.

General warehouse space, on the other hand, is generally smaller and located on the outskirts of major distribution hubs and serve multiple roles as storage, manufacturing, and general distribution facilities. "Flex" industrial assets are business parks that combine office space, industrial space, and manufacturing space. As these two

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