Will Industrial Real Estate Spark a True Recovery ?

With demand for warehouse space at its highest in years, there’s plenty of reason to cheer the state of the U.S. industrial real estate market.

There’s also plenty of reason to keep a level head, observers say.

Recent data show the industrial real estate market in the midst of a sustained rebound from the slump that hit in 2009 and lasted into 2010.

The industrial warehouse sector has seen six quarters of positive demand amid strength in autos, mining, electronics and other sectors.

“When you string that many positive quarters together it’s certainly a sign of strengthening stability,” said Kevin Thorpe, chief economist at Cassidy Turley, a commercial real estate services and research firm.

Investors have been skittish over the euro zone debt crisis. News of a deal to address it goosed stocks Thursday.

Thorpe expects near-term dips in the industrial property market due to continued macroeconomic risks.

“We will either get a slight dip or a slow economic scenario for the short term,” he said. “It will remain bumpy but generally positive.

Recovery From Recession

Cassidy Turley’s trends report for the third quarter says demand for U.S. warehouse space is back to pre-recession levels. Port cities, distribution center hubs and auto markets logged the best recent gains.

Demand for industrial warehouse space topped 24.7 million square feet in the quarter, the report says. It was the third straight quarter above the 20-million square feet mark.

Top gainers were Dallas, with demand above 2.9 million square feet, then Detroit (2.1 million); Chicago (1.4 million); Dayton, Ohio; (1.4 million) and Milwaukee (1.3 million).

The U.S. industrial vacancy rate fell 10 basis points quarterly to 9.2%. It is now 70 basis points below the peak of 9.9% in 2010’s second quarter. Average asking rents rose for the second quarter in a row.

“It was the strongest quarter in four years,” Thorpe said. “What I infer from that is there is still underlying strength in certain sectors of the economy driving those gains.

A report from CBRE Econometric Advisors also points to strength. It says industrial availability fell 20 basis points to 13.7% in the third quarter, the fourth quarterly drop.

Industrial availability refers to space actively marketed and available for tenant buildout within 12 months. Forty markets saw availability rates fall in the quarter. Six had no change and 14 had increases.

“Though there is clearly concern about the pace of economic growth, Q3’s commercial real estate results have remained in line with the modest pace of recent previous quarters,” said Jon Southard, director of forecasting at CBRE-EA.

The industrial warehouse sector’s slow rebound hasn’t ignited shares of industrial real estate investment trusts. All trade below 2011 highs.

But industrial REITs continue to bounce back from lows of early August, when a downgrade to the U.S. credit rating hammered the market.

The financial picture is also brighter for top industrial REITs, though REITs’ overall weak performance suggests investor skepticism.

The largest industrial REIT, San Francisco’s Prologis (NYSE:PLDNews), has four quarters of profit growth after two declines. It is seen growing earnings 20% or more each of the next four quarters. Its stock is down 7% year to date and up 9% since August.

Bethesda, Md.-based First Potomac Realty Trust (NYSE:FPONews), which owns industrial flex properties, is expected to move back to earnings growth mode after a string of declines. Shares are off 14% since the year’s start and up 12% since August.

Jackson, Miss.-based EastGroup Properties (NYSE:EGPNews), which has distribution facilities near major transportation hubs, has grown profit two quarters in a row to end a long run of declines. Analysts forecast that it will keep posting single-digit bottom-line gains the next couple of years. Its stock is up 6% since year’s start and up 11% since August.

Eye On Manufacturing

U.S. industrial production rose 0.2% monthly in September, up 3.2% vs. a year ago. It has either improved or been flat five months, led by strength in autos and auto parts.

“Demand for auto parts slowed in the first half of the year, but now there’s the expectation of a mini-rebound coming,” Thorpe said. Also for exports of chips and electronics.

“We’ve seen oil and gas prices drop substantially from where we were in mid-May,” he said. “The impact of that is a lower cost for businesses to stock up warehouses.

Thorpe expects most strength in the warehouse market to come from top-tier cities and properties.

Buildings in major markets “with good access to domestic and global markets, have strong cap rates and price appreciation,” he said. (credit, investors business daily)

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