Phil Hawkins, president and CEO of DCT Industrial Trust, Inc. (NYSE: DCT), sat down with REIT.com for an interview to discuss the performance of both his company and the industrial sector so far in 2012. Hawkins also offered his thoughts on the outlook for the coming year.
REIT.com: Has your company been able to sustain rents/occupancies in light of the soft economy?
Hawkins: We have made excellent progress increasing occupancy over the past several years. Our occupancy is up 280 basis points since the beginning of 2011 and 750 basis points since the beginning of 2010. As occupancies have increased, rents have firmed across the country and begun to increase in a number of markets such as Southern California, Seattle, Houston and Miami. In a slow-growth economy, our customers are very focused on managing the costs and speed of their supply chains and a key component of this effort is upgrading, reconfiguring and consolidating their distribution locations. We have certainly been a major beneficiary of this trend given the quality of DCT Industrial's assets and locations.
REIT.com: What has been demand been like in 2012?
Hawkins: Very strong in the first half of the year. DCT had record leasing in the first 6 months of 2012 with 9.2 million square feet leased. We did see a slowdown beginning in mid-July but leasing activity has picked up since late August which is encouraging. I expect demand for distribution space to remain healthy in the second half of the year although most likely at levels below the torrid pace of the first half. While there is plenty to be worried about in terms of domestic politics, U.S. economic growth, Europe's economy and debt woes, and Middle East tensions to name a few, it seems as if businesses have become accustomed to this slow growth environment and are essentially managing through it as best they can. Rather than crawl into a shell as virtually all businesses did in 2009, companies are focused on executing their business plans and doing what they can to become even more competitive. Cheap and relatively available financing, especially for larger companies, has also been a favorable driver of customer demand for our space.
REIT.com: Are you seeing any signs of business spending and demand for industrial space picking up in 2013?
Hawkins: Coming off a fairly strong 2012, my expectation is that demand for industrial space in 2013 will be fairly consistent with what we have seen this year. There will no doubt be periods of both better than expected demand as well as softer demand, reflecting the overall bumpy and uncertain recovery in the U.S. economy. Hopefully once the election is over, regardless of the outcome, business as well as consumer confidence will improve as will overall economic conditions. The negative political discourse leading up to the election has to have an impact on optimism and therefore overall economic growth and demand in what is a fragile recovery. We certainly are maintaining a cautiously optimistic view of the recovery and are applying fairly conservative assumptions to our future business plans, probably no different than most other businesses.
REIT.com: Based on tenant feedback, are they feeling confident about their businesses in the upcoming year?
Hawkins: While there are no doubt exceptions in both directions, my sense is that confidence levels looking ahead to next year are consistent with this year. Frankly, with political dysfunction in Washington, D.C. and no real signs of an increase in the pace of the recovery, it is hard for businesses to feel any more confident about the next twelve months than they did going into this year. I think it is rather remarkable that businesses continue to make decisions and spend money in light of the mostly negative economic and political news. It speaks highly of the U.S. economy's resilience and makes me optimistic about the future. But until the political discourse turns more constructive and at least a few of the major economic and political challenges around the globe are significantly mitigated, I don't expect much improvement in business confidence or optimism.
REIT.com: What is the biggest variable that will impact the performance of the industrial sector in the upcoming year?
Hawkins: Demand from smaller users. The larger companies have been the dominant drivers of our recovery so far. The smaller users have become more active in the past 9 to 12 months, a trend which we hope will continue and is important to reaching the next level of industry occupancy. My sense is that the confidence of small and medium businesses is more fragile than larger companies and therefore will be the source of both more risk and more upside relative to expectations in 2013. Early indications of a much awaited housing recover offer further encouragement about industrial demand in general and small customer demand in particular. Many of the companies that serve this most important sector of our economy are small and medium sized businesses and increased single family home sales and construction will be a major positive for our customers and the industrial real estate business.