REIT Sector Focus: Industrial Rally to Continue

2/2/2011 | By Carisa Chappell
An improving global economy and declining unemployment should result in falling vacancy rates, and industrial REITs are poised to cash in on the positive fundamentals, according to Jason Lail, senior industry analyst with SNL Financial.

“I think in general, there are pretty broad expectations that industrial vacancies will decrease this year,” Lail said in an interview with REIT.com.

Industrial REITs were up 4.03 percent in the first month of 2011, according to NAREIT data. The FTSE NAREIT All Equity REITs Total Returns Index was up 4.12 percent for the same period. After struggling through the majority of 2010, industrial REITs rebounded later in the year and posted a one-year total return of 30.98 percent, through Jan. 31.

Solid results, but trailing the 40.55 percent one-year return for the broader index.

While total returns in the industrial sector trailed the broader REIT market, Lail added that the recent announcement of the merger between leading industrial REITs AMB Property Corp. (NYSE: AMB) and ProLogis (NYSE: PLD) may help boost the sector’s performance.

“The announcement had a positive impact on the industrial market as a whole and on the two biggest players,” he said.

The merged company will not only be the largest in the industrial sector, but the fourth-largest REIT in the United States. “It has gained market share and that global footprint will help attract attention,” Lail said.

The merger has some observers wondering if there will be talks of more deals in the sector.

“There was certainly a positive reaction initially, but it won’t open the floodgate for deals in 2011,” Lail said. However, he added that it will cause other companies to wonder whether or not a merger would make good sense for them.

Rental rates are one of the challenges facing the industrial sector in 2011, according to Lail. “Working toward rent growth is a challenge but it could have a significant positive impact,” he said. “But, first they may need to work through one more year of excess supply.”

Industry analysts have noted that rental rates in the market are showing signs of stabilization. However, the consensus is that until vacancies decrease, industrial REITs can’t begin increasing rental rates.

SNL Industrial Sector Data (February 2011)


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