The pandemic has accelerated demand for warehouse space. According to a report by CBRE, the U.S. alone will need to add 330 million square feet of warehouse space by 2025 solely to support online order fulfillment. That forecast suggests industrial real estate owners will be able to continue expanding their footprints while benefiting from low vacancy rates and rising rental rates for the next several years.
Three industrial REITs well-positioned for this tailwind are Duke Realty (NYSE: DRE), EastGroup Property (NYSE: EGP), and Equity Commonwealth (NYSE: EQC). That makes them stand out as compelling buys this month.
A leader in the U.S.
Duke Realty is the largest logistics REIT focused solely on the U.S. market. It owns an interest in 543 facilities with 162 million square feet of space.
One factor that stands out about Duke is its development expertise. The company has developed 67% of its current portfolio, creating significant shareholder value in the process. It currently has $1.4 billion of development projects underway and has already pre-leased 65% of that space. Meanwhile, it expects to start between $950 million to $1.15 billion of development projects this year. When combined with strong rent growth due to red-hot demand for warehouse space, Duke expects to deliver top-tier FFO (funds from operations) growth over the next couple of years. Those factors should drive compelling total returns for Duke's shareholders.
Focused on the fastest-growing regions
EastGroup Properties focuses on owning industrial real estate in fast-growing Sun Belt markets. The REIT currently has properties in 13 of the 15 fastest-growing logistics markets. Overall, it has 47 million square feet of space in its portfolio.
The company also has an excellent development history. It built 46% of its current portfolio, investing $1.8 billion to develop industrial parks across the south. The REIT currently expects to invest $250 million to start 2.2 million square feet of new developments this year.
EastGroup Properties also makes select acquisitions, with a heavy focus on value-add opportunities. It will purchase properties that have high-return development or redevelopment upside. It's currently investing $260 million across 15 projects totaling 2.7 million square feet of space. When combined with above-average rent growth due to its focus on rapidly expanding markets, its development and value-add investments should help drive above-average total returns over the next several years.
Pivoting to the fast-growing industrial sector
Equity Commonwealth is currently an office REIT. However, the company is transitioning to the industrial sector by acquiring Monmouth Real Estate Investment (NYSE: MNR). It had already sold off most of its office portfolio in recent years and will unload the remaining ones to focus entirely on the industrial space.
The merger with Monmouth gives Equity Commonwealth a solid logistics platform. Monmouth currently owns 120 logistics properties with 24.5 million square feet of space. In addition, it has agreed to acquire six more with 1.8 million square feet. Meanwhile, the combined company will have a cash-rich balance sheet thanks to Equity’s office-building sales, giving it ample financial flexibility to purchase and develop additional logistics properties to expand its portfolio. Those factors position Equity Commonwealth to deliver healthy FFO growth over the next several years.
Well-positioned for this megatrend
The U.S. needs to build out significant new warehouse space by 2025 to fulfill online orders. That should enable Duke, EastGroup, and Equity Commonwealth to continue expanding their portfolios. Add that to low vacancy rates and strong rental growth potential, and these industrial REITs should deliver fast-paced FFO and dividend growth. That could give them the fuel to generate strong returns, making them compelling buys this July.