The intense demand for industrial space in America is no big secret. New research from commercial real estate services giant Jones Lang Lasalle says that vacancy dropped below 3.8% nationwide for the first time ever. Almost a half-billion square feet of new space is under construction.
Competition for existing space has driven up rents -- the JLL report says they have risen by 11.3% since the end of 2020. Owners of such spaces have made a lot of money, including shareholders of real estate investment trusts (REITs) that own and operate such properties.
The National Association of Real Estate Investment Trusts (NAREIT) counts 13 publicly traded companies in the industrial REIT sector and says they posted a total return of 47.11% in 2021. That same group was down about 14% heading into this month year to date, which makes now a good time to consider bargains in that sector.
Let's look at two of them. Prologis (PLD 0.60%) is a global operator and among the largest of all REITs, regardless of sector. The other is much smaller and a specialist in U.S. coastal markets: Terreno Realty (TRNO 2.12%).
Which is a better buy now? Let's take a look.
Image source: Getty Images.
David and Goliath share a hometown
Terreno and Prologis are both based in San Francisco. Prologis has a portfolio of about 4,700 logistics properties in 19 countries on four continents. It has about a billion square feet of space and 5,800 customers in two major categories: business-to-business and retail/online fulfillment.
Terreno has a portfolio of about 250 buildings and 15.1 million square feet and another 36 improved land parcels that it leases for storage space and could be developed. Its market is geographically limited to Los Angeles, Northern New Jersey and New York City, the San Francisco Bay Area, Seattle, Miami, and Washington, D.C., and areas close to logistics nodes such as ports and major rail and highway arteries.
Both companies are focused on growth, adding to their portfolios regularly, and both have similar share performance records.
Prologis, with a market cap of about $118 billion, has raised its dividend for nine straight years and is currently yielding about 1.98%. Its payout ratio is a modest 57.4% based on 2022 estimated earnings. Terreno also has raised its dividend for nine straight years and is now yielding about 1.88% with a payout ratio of 63% based on 2022 estimated earnings.
REITs make good long-term investments and are typically viewed as more of an income than a growth play. Both of these companies have done very well in terms of total return, far outpacing the broader market.
PLD Total Return Level data by YCharts.
Terreno has dipped more than Prologis, giving it the nod
Now, let's look at their stock prices. As the chart below shows, Prologis and Terreno shares have struggled so far this year, along with the overall market. Prologis has rallied of late and has less ground to make up than its smaller rival.
That ground to make up helps prompt me to give the nod to Terreno. Both companies are deeply engaged in a sector that should have years to run as capacity in the supply chain catches up with demand. Both have already shown they can respond to that demand efficiently and profitably.
Their performances and prospects appear so similar that stock price alone can be a deciding factor, and right now Terreno appears more unnecessarily beaten down to me than Prologis. That profit-taking after a strong 2021 creates a new opportunity for a buy-and-hold now for either of these companies, but I'll take the little guy right now. I already have. I've owned Terreno stock for about a year now and will probably be adding to that stake.
