2020 has been a bumpy ride for most Real Estate Investment Trusts (REITs) of all kinds. Several REITs were growing quite nicely just before a sudden crash from the coronavirus scare. While many of them have been on a steady recovery, certain property types haven't been able to completely win back the trust of investors.
The impact on retail stores has directly affected storage, distribution, and logistic companies. So, are industrial REITs risky right now?
Industrial real estate demand
You first have to look at the actual industrial real estate market to determine the outlook for industrial REITs. This means you have to look at the companies that are occupying these industrial properties to see which direction the demand will go.
According to NAREIT, logistics facilities make up two thirds of all industrial real estate owned by REITs. Many of these facilities are handling the increased activity from the rapid growth in e-commerce sales. E-commerce was already showing significant growth year over year before the pandemic, so demand has been increasing for these types of properties.
Taking a look at three of the largest industrial REITs, it appears their top tenants should remain resilient through a down economy and should even continue to require more real estate.
Prologis (NYSE: PLD), STAG Industrial (NYSE: STAG), and Duke Realty Corporation (NYSE: DRE) share some of the same major tenants.
Each of these REITs share Amazon (NASDAQ: AMZN) as their top tenant and have companies like UPS (NYSE: UPS) and FEDEX (NYSE: FDX) as major tenants as well. These three companies are obviously tightly tied to e-commerce. More categories of goods are also becoming available for online purchases, most notably, groceries and furniture.
Americold Realty (NYSE: COLD) is an industrial REIT that invests in cold storage facilities, and they were already seeing an increase in demand for cold storage for online grocery sales before the pandemic.
The increased online sales activity has been creating a supply chain bottleneck. Not only are more products being shipped to consumers but there is also a significant increase in the number of returns being sent back. This is creating a demand for more distribution points throughout the U.S. and worldwide to keep up. This means it's very likely that these types of industrial properties will continue to grow in demand.
Besides logistics, we're very likely to see more manufacturing returning to the United States. Manufacturing unions and trade groups are requesting support from the federal government to increase the manufacturing of personal protective equipment domestically. This is a popular initiative to reduce the dependency on foreign sources of these products and materials.
Industrial real estate outlook
The availability rate of industrial real estate has remained steady in 2020, despite an increase in supply. This is showing that the demand is still outpacing construction.
CBRE's (NYSE: CBRE) U.S. Industrial & Logistics Figures Q2 2020 report shows a very popular outlook. Some of the key findings in the report include:
- Overall net absorption of 19.2 million square feet.
- Average asking rents of $7.96 per square foot -- an increase of 1% quarter over quarter and 6.3% year over year.
- Overall vacancy rate of 4.7%.
- 309.7 million square feet under construction -- 36% is already pre leased.
- 116.8 million square feet of completed development YTD.
- Industrial market is outperforming forecasts for net absorption and lease rates.
The outlook for industrial real estate remains strong. This is a good sign for industrial REITs that have been able to manage a healthy balance sheet. These REITs will be better suited to finance the development of new properties without having to sell too many shares.
Industrial REIT performance
The industrial real estate market appears strong, but how strong are the top industrial REITs in the current market?
We'll compare some of the financial data from the first two quarters of 2020 from our top REITs compared to the first two quarters of 2019.