This year has been an excellent one for the industrial real estate sector. Demand is through the roof, pushing vacancy rates to record lows while driving up rental rates. As a result, industrial real estate values are soaring.
These robust market conditions likely have investors taking stock about what to do with their industrial real estate holdings. Here are a couple of things to consider doing before the end of the year.
1. Consider whether it's time to cash in
For those who directly own industrial real estate, the red-hot market has driven property values skyward. Industry-leading industrial REIT (real estate investment trust) Prologis (NYSE: PLD) noted in its third-quarter earnings reports that it's seeing record increases in market rents and property valuations. Because of that, investors who directly own industrial real estate might want to consider cashing in on their investment amid the red-hot market conditions.
Now might be a good time to consider selling because the Biden administration has proposed limiting the capital gains an investor can defer through a 1031 exchange to $500,000. Further, the administration has proposed increasing the maximum capital gains tax rate, which could see it go from 20% to 39.6%.
While 1031 exchanges are complex, crowdfunding platforms like 1031 Crowdfunding make it easy to complete a tax-deferred trade. An investor could take advantage of the current market conditions and tax system to cash in on their industrial property and diversify their holdings across several strong commercial real estate sectors.
2. Look into investing in a development project
The industrial real estate market is growing tighter by the day due to strong demand. While the industry completed a record amount of new industrial space during the third quarter, tenants absorbed more space than the sector added. That drove vacancy rates to another record low while hiking up rental rates.
That's leading the industry to continue building, which requires investor capital. This means investors with a lot of money to deploy might want to consider investing in an industrial development project. Accredited investors (i.e., those with high income or net worth) can invest in industrial development real estate syndication deals on many crowdfunding platforms. While they often require high investment minimums and long holding periods, they also offer the potential to earn high returns.
3. Think about buying shares of an industrial REIT
Investors with less capital to deploy could consider buying shares of an industrial REIT. These entities hold large portfolios of industrial properties, positioning them to benefit from the sector's continued growth.
For example, Prologis noted that its "earnings potential is unrivaled." Rental rates on its existing portfolio are currently 22% below market rents. This means it can steadily capture higher market rents as current leases expire. On top of that, it has a $21 billion development pipeline, positioning it to capture growing demand.
Meanwhile, Prologis has a top-tier financial profile, giving it the flexibility to fund that pipeline and make acquisitions. The company has a history of delivering above-average compound annual earnings and dividend growth, which have helped drive strong total returns for its investors in recent years. With plenty of growth ahead, Prologis could continue delivering attractive returns for its investors.
Several other industrial REITs offer similar growth potential. Notable names include EastGroup Properties (NYSE: EPG) and STAG Industrial (NYSE: STAG). EastGroup focuses on developing industrial properties across the fast-growing Sun Belt region, while STAG Industrial primarily acquires industrial properties with a knack for taking a value-add investing approach. Both industrial REITs have delivered strong returns in recent years and are in an excellent position to continue growing shareholder value in the future.
Now's a good time to consider making a move
Conditions in the industrial real estate market are as robust as they've ever been, so investors should take stock of their position in the market. For some, now might be an ideal time to cash in ahead of a potentially significant tax change. Meanwhile, others might want to look at a way to increase their investment in the sector, given the growth that's ahead as we move into 2022.