Rexford Industrial (REXR 0.22%) is an industrial real estate investment trust (REIT), but it looks at this broad market in a very specific way, geographically speaking. Not only does it focus on a single state, California, but it is even more focused on a single area within that state -- Southern California.

That focus has worked out very well so far for Rexford, and there's no sign that the positive trends are going to change.

The industrial niche Rexford serves

Industrial real estate really encompasses two broad types of property: factories and warehouses. Both are vital to the ebb and flow of global trade. The recent uptick in interest in industrial-focused REITs is at least partly driven by the supply chain issues created by the coronavirus pandemic and supply chain integrity issues driven by geopolitical conflict. While manufacturing assets can be located just about anywhere, warehouses are often highly concentrated around transportation hubs, like ports.

A person in a warehouse working on the fulfillment of online orders.

Image source: Getty Images.

That's one of the reasons why Rexford Industrial's property portfolio is highly concentrated in Southern California. That's a bit unique in the industrial sector, with most REITs offering more diversification. On the one hand, Rexford's approach increases geographic risk, on the other, it opens up opportunity. For example, industrial vacancy across the U.S. is estimated to be around 3%, but it is just 1.1% in Rexford's collection of Southern California markets.

Rexford's occupancy at the end of 2022 stood at a very attractive 98.7%. There are always moving parts, so this figure is probably as high as you should expect it to be, speaking to the very attractive region it serves. But there are additional benefits that shouldn't be ignored. With high demand comes pricing power, highlighted by the fact that Rexford was able to increase comparable lease rates by nearly 60% year over year in 2022.

More to come for Rexford?

Here's the interesting thing: While the future may not be quite as bright as the recent past, there's no particular reason to believe the general upward trajectory is going to change. For example, while the average vacancy rate for the regions Rexford services is 1.1%, there are submarkets where vacancy is as low as 0.5%. That suggests that the REIT will continue to have material pricing power in the future.

Strong occupancy is buttressed by the fact that industrial properties in Rexford's chosen markets are being torn down for other purposes, like housing. Specifically, management estimates that since 2001 roughly 125 million square feet of industrial space has been demolished, most of it in the REIT's core region. Meanwhile, there are high barriers to entry for new construction, including zoning restrictions that favor housing.

In addition, California as a whole represents the largest industrial market in the U.S. In fact, if you pulled it out by itself, California would be the fourth-largest industrial real estate market in the world. So Rexford still has opportunities for growth ahead of it, and it is currently looking at up to 2,000 potential property deals. Clearly, all of those will not come about, but it is clear that management is not hurting for investment opportunities.

Is it time to buy Rexford?

Suggesting that Rexford Industrial is the best industrial REIT you can buy would be a step too far. There are cost/value issues to consider and, as noted, it is not well diversified. However, with funds from operations growth of 19.5% in 2022 and a dividend increase of just over 20% declared in the fourth quarter, dividend growth-oriented investors might want to at least take a closer look. Sure, the dividend yield is a modest 2.5% today, but if the quarterly payment keeps growing at a dramatic clip, your yield on the purchase price will expand rapidly.