Shares of Rexford Industrial Realty (REXR 1.12%) tumbled 12.4% in April, according to data from S&P Global Market Intelligence. Weighing on the real estate investment trust (REIT) was tariff-driven volatility in the market and its first-quarter financial results.
Tariffs drive uncertainty
Last month, the Trump administration surprised the market by launching unexpectedly high reciprocal tariffs on global trading partners to help rebalance trade. They caused significant market volatility as stock prices tumbled and Treasury bond yields soared, the latter of which can have a significant impact on the value of commercial real estate.
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Tariffs could also affect demand for industrial real estate, especially in Southern California, where Rexford focuses. It could cause imports to decline, which could reduce demand for warehouse space. Tariffs could also cause a recession, which could also affect demand.
Those headwinds could further affect what has already been a soft market. Rents for warehouse space in Southern California declined by 2.8% in the first quarter and have fallen 9.4% over the past year. However, that was mainly due to an excess supply of large properties -- that is, those exceeing 100,000 square feet. Rexford focuses on owning smaller properties of less than 50,000 square feet, which have seen more resilient demand. As a result, the spread it captured between rents on expiring leases and new ones signed during the quarter was up 14.7% on a cash basis. That's a 20.2% increase for renewal leases against a 5.4% decline for leases with new tenants.
NYSE: REXR
Key Data Points
Tariffs have caused some additional slowdown in leasing activity during the early part of the second quarter as tenants defer making leasing decisions because of increased economic uncertainty. The company's vacancy rate could tick up in the near term, and rents might not rise as much as anticipated.
Time to buy or say goodbye?
Although there's a lot of uncertainty in the near term, Rexford Industrial believes it's in a strong position for the medium and long term. The company owns a high-quality portfolio in Southern California, where there's a long-term imbalance between demand for space and supply, which should make its portfolio even more valuable in the future. Furthermore, its properties primarily serve regional consumption, not global trade. That drives its view that rents should rise in the coming years.
Rexford currently expects that embedded annual rent escalations, securing higher market rents as legacy leases expire, and its current slate of repositioning and redevelopment projects will grow its net operating income by 40% over the next few years. Meanwhile, there's additional upside potential from acquisitions, improving market conditions, and new redevelopment/repositioning projects. That should enable the REIT to continue increasing its high-yielding dividend, which got up to 5% after last month's slump. That combination of income and growth could help the REIT to produce strong total returns over the coming years, making it look like a compelling buy following last month's performance.
