Industrial REITs continue to face pressure worldwide, and the latest data indicate the sector has yet to truly enter a recovery phase, according to Steven Frankel, analyst with Green Street Advisors and head of the firm’s industrial sector team. In the latest edition of Word on the Beach: Green Street Advisor’s Monthly Market Insights for August 2010, Frankel talks with REIT.com’s Allen Kenney about the state of industrial sector fundamentals.

Of particular note in the United States, Frankel says, are trends in inventory re-stocking and consumption. Consumers are buying less, while retailers are emphasizing "just-in-time" inventory processes. "Unless these trends are reversed, net absorption is likely to be subdued compared with prior cycles," Frankel says of the sector’s potential for recovery.

Frankel says that Green Street’s current view of the sector is through a "new normal" lens and that it expects economic growth and consumption will be constrained over the medium-term as the United States works through a de-leveraging cycle and consumers pay down debt instead of spend. Additionally, Frankel said he expects the U.S. recovery to differ between coastal and inland markets.

"We expect coastal markets to recover more quickly. We saw evidence that most of these markets bottomed in the second quarter. Vacancy remains high in coastal markets, but is several hundred basis points lower than in inland areas, which gives these higher-barrier markets a leg up in turning things around," Frankel says. "In addition, coastal, port markets tend to have large population centers, a more stable source of demand than the robust consumption needed for large, one million plus square foot warehouses in the middle of the country."

When it comes to opportunities in the current market, Frankel says that REITs can take advantage of the current environment through selected acquisitions. He believes that the market for core, prime assets has heated up, notably on the coasts. He adds that there remain opportunities to acquire good value-add or secondary quality product at attractive prices and meaningful discounts to replacement cost.

According to Frankel, there is also increased appetite on the part of private capital sources, which should enable some of the REITs to raise new funds.

"In addition, while there remains a large overhang of existing stock, there has been increased build-to-suit activity, which some REITs are capitalizing on. Generally, the REITs with the better balance sheets in the sector will be able to take advantage of more opportunities than their higher-levered peers," Frankel says.