03/25/2014 | by
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Robust demand for space, fueled by improving economic fundamentals and limited supply, is expected to bolster the industrial REIT sector for the rest of 2014, according to analysts.

So far in 2014, the sector has continued to outperform the broader REIT market. Total returns for industrial REITs gained 7.4 percent last year, compared with a 2.9 percent gain for all equity REITs. As of March 24, total returns for industrial REITs were up 9.4 percent for the year, versus a 6.8 percent gain for all equity REITs.

A report by the NAIOP Research Foundation estimated that net demand for industrial space could reach 250 million square feet in 2014, compared with 233 million square feet in 2013. In 2012 demand totaled 106 million square feet.

 Thomas Bisacquino, president and CEO of NAIOP, the commercial real estate development association, pointed out that demand for all types of industrial space, such as warehouse, distribution centers, and manufacturing, is “robust.”

Green Street Advisors analyst Eric Frankel observed that demand for warehouse and distribution space is improving most rapidly. He said he believes that widespread demand and muted supply should push overall market rents 1 to 5 percent higher in the near term.

SNL Financial analyst Jason Lail noted that from a financial standpoint, industrial REITs appear healthy.  “The balance sheets are nice and clean, and we have seen positive same store growth for just about all of the industrial REITs,” he said.

Housing, E-Commerce Driving Demand

The NAIOP study pointed to strengthening in the housing market as a significant factor driving the demand for industrial space, as building products and materials need to be warehoused and shipped across the country.

According to Frankel, other factors propelling demand for space include growth in trade, growth in employment, rising inventories, improving business confidence and an increased willingness for companies to invest in supply chain configuration.

Analysts also cited the popularity of e-commerce as contributing to the performance of the industrial sector.

“An intense increase in e-commerce has steepened the demand for distribution and fulfillment centers, and companies are gobbling up space as a result,” Bisacquino said.

Matthew Werner, an analyst and portfolio manager at Chilton Capital Management LLC, noted that industrial REITs are “direct beneficiaries of the shift toward online purchases.” He noted that the new trend to ship to consumers in two days or less has dramatically increased the amount of space that companies such as Amazon.com need to fill orders on time.

“We suspect the growing market share by online purchases is inevitable, and industrial REITs will be a prime beneficiary of the switch,” Werner said.

New Supply Coming off Low Recession Levels

Meanwhile, although new supply in the industrial sector is increasing, it is coming back from depressed levels.

According to Werner, the industrial sector’s close ties to the economy created a 500 basis point increase in industrial REIT vacancy during the recession. The need for new industrial buildings was close to zero for several years as vacant space was re-leased, he explained.

“There really hasn’t been a whole lot of new supply coming on line,” said SNL’s Lail, while occupancy levels are very strong. A market commentary from Green Street Advisors also noted that supply has been kept in check because development financing has become harder to secure.

Werner said the combination of accelerating demand and measured supply growth has created an “overwhelmingly positive environment for well-located, high-quality warehouse space.”