Use of leverage for real estate investment trust (REIT) business makes returns from this industry susceptible to interest-rate movements. This is because rise in interest rate affects the present value of future cash flows.
However, when fundamentals of the underlying asset category, to which the REITs cater to, remain strong, there is scope for increasing future cash flows from the assets. This is how REITs emerge as winners even with rate hikes.
For instance, the industrial asset category has grabbed attention on the back of robust demand, recovering economy and job market, strengthening e-commerce market, and healthy manufacturing environment.
Particularly, amid economic expansion, e-commerce development and heightened urbanization, companies are shifting strategy toward services like same-day delivery and other options, fueling demand for warehouse distribution facilities.
Amid this, the industrial investment momentum has gathered steam and superseded the overall commercial real estate market, with investors enhancing the industrial holdings, per a report from real estate services company, JLL Inc. JLL. In fact, investment sales aggregated $23.8 billion in the first half of this year. This marked more than 20% increase year over year.
Also, industrial rents have touched an all-time high of $5.35 per square foot in the second quarter of 2017 amid the national historic low level of vacancy. While more new supply is coming to the market, there is dearth of quality vacant space in the market to absorb, per the report.
Leasing activity for new construction is particularly led by e-commerce, logistics and distribution companies. According to a report from Prologis Inc. PLD, for a given level of revenues, online retailers require three times the distribution center space compared with traditional retailers. This is opening up opportunities for industrial REITs like Prologis, DCT Industrial Trust Inc. DCT and Duke Realty Corporation DRE.
Against such a favorable backdrop, industrial REITs delivered returns of 19.3% through August 2017, handily outpacing the broader market. Considering the improving economy and healthy fundamentals of the industrial sector, this trend is likely to continue.
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