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Raising the Rent -- and the Ceiling -- on Industrial Real Estate

By Marc Rapport – Dec 2, 2021 at 9:50AM

Key Points

  • Industrial real estate is seeing record demand and room to run.
  • The shift from “just in time” to “just in case” inventory will continue to propel this market.
  • Opportunities exist among REITs and other investing channels.

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The shift from "just in time" to "just in case" is underway.

The current state of industrial real estate was nicely summarized in a report by Prologis (PLD -3.38%) in which the largest real estate investment trust (REIT) of its kind says that logistics warehousing space is effectively sold out.

That's not just for Prologis. That's for all the clients and landlords in that vast global supply chain that helps feed, clothe, and provide the building supplies to shelter America.

Person waving in a freighter for docking.

Image source: Getty Images.

Demand from e-commerce, manufacturers, and suppliers of all kinds has pushed the vacancy rate to a new low of 3.9%, and rent grew a record 7.1% quarter over quarter in 3Q21, Prologis says. Meanwhile, net absorption -- the amount of space newly occupied minus space newly vacated -- hit a record high of 280 million square feet (MSF) year to date, more than twice last year's level.

Another report -- this one from real estate advisor and manager Transwestern -- puts that net absorption total for the past four quarters at a record 500 million square feet (MSF).

Transwestern says there's now 636.6 MSF under construction nationally, twice the level five years ago, but Prologis also says another 800 million MSF will be needed to fix the shortage. And that will be just the beginning of what could be a long-term rally driven by a sea change in how such space is used.

From "just in time" to "just in case"

Many companies are more focused on their immediate inventory challenges than stocking up on storage and logistics space, but once they get over that hump, it looks like there could be a "back to the future" moment coming here.

"Just in time" inventory became global standard practice for major manufacturers decades ago but now may well be on the decline as a growing litany of disruptions, from issues ranging from weather to labor to supplies, makes keeping a larger supply of what you need on hand more of an imperative.

And that demands more space. I've seen several reports that talk about how manufacturers and retailers are focusing on rebuilding inventory now, and once they get over that hump, the demand for long-term and logistics space could well grow even more.

That would explain why big money is pouring into building big spaces. It's not just about now. It's about then. And there are plenty of ways for individual investors to get involved.

Look to coastal and secondary markets -- and these REITs -- to capitalize now

The Transwestern report says that about 27% of the 636 million or so square feet of industrial space under construction now is in just six markets: Dallas, Phoenix, Atlanta, California's Inland Empire, Chicago, and Philadelphia. That company's analysis points to rising rents there and in similar big markets raising the attractiveness of investing in other markets such as Savannah, Georgia, and Pennsylvania's Lehigh Valley.

Meanwhile, Prologis points to gateway locations as continuing their attractiveness, because they're at -- well -- the gateways from ports to everywhere else in the country, and that there are generally higher barriers to new development there that will keep demand ahead of supply.

As for gateway markets, there are industrial landlords that call that a specialty. One of them is Terreno Realty (TRNO -1.67%), a relatively small REIT that operates in six markets: Los Angeles, New York/New Jersey, San Francisco, Seattle, Miami, and Washington, D.C. The company is on a buying spree, too, announcing three acquisitions in just the past few weeks.

Investors interested in REITs with a broader reach can of course consider Prologis, with its portfolio of 4,675 buildings in 19 countries on four continents. Other well-known names in industrial REITs include Duke Realty (DRE) and Industrial Logistics Properties Trust (ILPT -6.23%), which really made a name for itself recently by besting billionaires Sam Zell and Barry Sternlicht in a winning bid for Monmouth Real Estate Investment (MNR).

But you don't have to a mogul to make your mark in this market. Along with the relative simplicity of REITs, the more adventurous among us can consider commercial real estate crowdsourcing or opportunity zone investing in some of these smaller markets -- especially if the popularity of last-mile logistics continues to create demand for smaller spaces in tucked-away locations.

Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Prologis and Terreno Realty. The Motley Fool has a disclosure policy.

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