Shares of industrial-focused real estate investment trusts (REITs) have tumbled more than 25% this year. The main issue is concern that the economy is slowing down, which could cool off demand for warehouse space.
However, the industry isn’t seeing any signs of a slowdown in demand. That’s evident from the recent numbers reported by some leading industrial REITs. They show that these companies are starting to run out of space, suggesting that rental rates could continue their scorching rise.
Prologis: The industry bellwether
Leading global industrial REIT Prologis (NYSE: PLD) recently reported its second-quarter earnings, which were exceptionally strong. The company signed 51.3 million square feet of leases during the period — 43.6 million square feet from its operating portfolio and 7.7 million square feet in its development portfolio — with rental rates on the same space surging 45.6%, led by 54% rent growth in the U.S. As a result, Prologis ended the period with a 97.6% occupancy rate, while its same-store net operating income (NOI) grew by 8.2%.
Despite growing economic uncertainty, Prologis “expect[s] strong demand for our properties to continue,” according to comments by CEO Hamid Moghadam in the second-quarter earnings release.
That’s evident in its guidance. The REIT increased its forecast for average occupancy from a range of 96.75% to 97.5%, up to 97.25% to 97.75%. The REIT also boosted its outlook for NOI growth and core FFO. Given its strong occupancy level, REIT maintained its plan to start $4.5 billion to $5 billion of new developments this year so that it doesn’t run out of space amid continued robust demand.
Duke Realty: Almost sold out
Duke Realty (NYSE: DRE) reported even stronger numbers. The leading U.S.-focused logistics REIT said occupancy rose to 99.7%, up from 99.4% in March and 98.2% last June. Meanwhile, even after adding in its development portfolio, which includes properties it built on spec, the company’s total portfolio is now 95.7% leased.
Rental rates were through the roof. The company signed 9.9 million square feet of leases at an average of 69% above the rental rate on expiring leases. The company signed more leases in the second quarter than the first at a higher average rental increase.
Duke’s nearly fully leased portfolio bodes well for Prologis, which agreed to acquire its next largest rival for $26 billion earlier this year. Duke’s strong numbers make the deal look even better. With limited available space, rents should hold up even during an economic downturn. All this means Duke and Prologis will still be able to grow their rental income at an attractive rate.
Terreno Realty: Occupancy continues to rise
Terreno Realty (NYSE: TRNO) also recently reported strong numbers when it updated investors on its quarterly operating, investment, and capital markets activity in early July. The industrial REIT reported 97.9% quarter-end occupancy, compared to 96.9% at the end of the first quarter.
With occupancy continuing to rise, the REIT is running low on available space. That’s driving up rental rates, which surged 55.4% compared to the prior level on the half-million square feet of leases it signed during the quarter.
The company also noted that it acquired several properties with leases that expire soon. That sets it up to capture higher market rates as those leases roll over to the current higher market rents.
No signs of a slowdown in sight
While there are growing concerns that the economy could enter a downturn, there aren’t any signs that things are slowing down for industrial REITs. Many are running out of space to rent because demand remains robust. That’s driving up rental rates while providing these REITs opportunities to expand.
Given those strong market conditions, the more than 25% sell-off in industrial REIT stocks looks like a buying opportunity. These REITs should continue growing their rental income even if the economy slows down because of the widening gap between market rates and rents on their existing leases.
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