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Will Industrial Real Estate Stay On Top in 2022?

By Liz Brumer-Smith – Dec 6, 2021 at 1:30PM

Key Points

  • Industrial REITs outperformed all other commercial REITs by over double in 2021.
  • Long-term indicators show industrial real estate will likely stay on top in 2022.
  • 2022 could be another double-digit year for industrial REITs.

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Industrial REITs outperformed all other REIT sectors by over double in 2021 -- will this trend continue in 2022?

Industrial real estate has been a top performer among commercial real estate (CRE) investments over the past decade. For the past five years, industrial real estate investment trusts (REITs) have outperformed all other commercial REITs by sector according to NAREIT data. Year to date 2021, the industrial sector has earned an annual total return of 32.38% according to The National Council of Real Estate Investment Fiduciaries (NCREIF), over double the next leading CRE sector.

Over that time, investors have made a lot of money from the exceptional growth within this industry, leaving many investors to wonder where the industry is headed and if this industry will be able to sustain its title of being on top in 2022.

Construction workers standing in front of a crane on construction site against the backdrop of a city.

Image source: Getty Images.

Will industrial demand be sustained in 2022? 

Supply and demand is the greatest determinant for industrial real estate growth potential in 2022, and right now all signs point to sustained demand well beyond 2022. The last decade's explosive growth for the industrial sector is largely thanks to the rise of e-commerce. As more people shop online, more demand is created for industrial properties to manufacture, store, and coordinate the delivery and shipping of goods.

From 2014 to 2020, e-commerce sales rose 220% to a staggering $4.28 trillion in 2020. With numbers like that, it may not seem like this trend could be sustained, but e-commerce sales make up less than 20% of all retail sales today, meaning there is still huge potential for growth.

A report published by Prologis (PLD -3.58%), one of the largest industrial REITs, gave insights into the voracious demand the industry is seeing today. Vacancy rates have reached a record low of 3.9% while rent growth has increased 7.1% quarter over quarter as tenants compete for space. Net absorptions have also reached a new high of 280 million square feet year to date. Warehouse space, as well as logistics and fulfillment centers in particular, are seeing high demand, but there may be new drivers that support sustained demand for all industrial properties in 2022 and beyond.

Supply chain challenges across the globe are driving manufacturing back to the U.S. This is helping drive new long-term demand for industrial space aside from traditional warehouse space. Manufacturing centers that serve producers here in the U.S. are seeing an increase in demand. According to a recent report by Jones Lang LaSalle, small- to mid-size industrial real estate is experiencing the greatest demand among industrial properties because of last-mile facilities; logistics centers that are the final step in e-commerce delivery; and crucial services, like two-day shipping.

Independence Realty Trust is one of the few industrial REITs that have a sizable portion of its portfolio dedicated to small- and mid-size industrial properties that serve this niche and largely one of the reasons IRT was able to outpace all other competitors in the industrial REIT space in 2021. 

All signs point to "yes"

Deliveries and new construction of industrial space are down in 2021 while net absorption for industrial space has reached the highest level on record, meaning there isn't much concern for overdevelopment in the coming year. Boston paved the wave for industrial demand in 2021, with other cities along the east and west coasts following quickly behind, meaning these areas could hold further opportunity in the coming year as well. It seems 2022 is positioned to be another insane year for the industrial sector, making right now a great opportunity to invest in some of the top industrial REITs.

Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Prologis. The Motley Fool has a disclosure policy.

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