While most commercial real estate is showing signs of slowing demand, the industrial real estate segment is still very much booming. Lack of supply and high demand is causing rents and occupancies to soar.

Yet despite the segment's strong performance, share prices for nearly all industrial real estate investment trusts (REITs) are down notably in 2022. For example, STAG Industrial (STAG -0.27%) is down nearly 42% year to date.

Based on the average price target among Wall Street analysts following the stock, however, STAG Industrial has as much as 49% upside potential in the near term.

A glimpse at this industrial landlord

STAG Industrial is a pure-play industrial REIT. It owns roughly 559 industrial warehouses in 40 states, and leases them to tenants including big-name e-commerce companies like Amazon, major manufacturers like Lippert Component Manufacturing, and logistics and distribution companies like FedEx

The REIT uses long-term net leases with terms ranging from four to seven years, and its agreements include built-in rent escalators. This provides the company with steady income streams while also providing it with opportunities for additional rent growth as leases expire and as it makes acquisitions and develops new properties (which it's actively doing).

Around 40% of STAG's portfolio is occupied by companies directly connected to the e-commerce industry, so if a recession unfolds in the coming year, it would certainly not be immune to its impacts. However, its diverse mix of tenants outside of e-commerce is an advantage. Also, its portfolio is currently 98.1% occupied, which is a testament to the robust demand in the industrial space.

Let's talk upside

Rents in the industrial space have grown by double-digit percentages consistently for the past few years, so lease expirations hold massive upside potential for STAG. As of the second quarter of 2022, its rent growth was only 4.7% year over year, which doesn't sound huge. But if you look at its renewing contracts -- and the REIT has a 90% tenant retention rate -- its rental growth was a whopping 14.1%.

Between now and the end of 2023, the company has 110 leases expiring, accounting for roughly 11.7% of its annualized base rents. Even without additional rent growth or outside acquisition or leasing activities that's a notable portion of leases that could see rents grow as much as 14% in the near future.

Acquisitions are also contributing to STAG Industrial's growing top line. Year to date, the REIT has acquired 17 properties, adding 3.2 million square feet to its portfolio. It just raised its acquisitions guidance for the year to $1.1 billion, which would certainly add to its headline numbers in the coming year.

Too much debt can quickly squander any upside potential, especially if we enter a recessionary period. So it's important to consider this company's debt levels relative to its earnings and cash on hand. For a REIT, its debt ratio of 5.1 times its funds from operations (FFO) appears in decent shape, and it has $20.4 million in cash on hand.

Its near-term debt maturities are just under $300 million, so the company will need to sell some assets, issue more stock to raise money, or restructure its loans to pay off or refinance those debts. But the company is addressing this. It sold two properties this year, generating net proceeds of $39 million, and it recently restructured some of its near-term debt and increased its revolving credit line to $1 billion to help increase its liquidity position.

STAG has been known to issue stock to raise capital in the past, which has a dilutive impact on current shareholders. Its most recent issuance was Nov 2021 and if it does that again, it could hinder its ability to achieve the 49% share price growth that analysts predict over the next 12 months or so.

Is STAG Industrial a buy?

STAG Industrial's stock price is near a 52-week low, and because it has a large number of lease expirations coming up in the near term and is engaging in robust acquisition activity, I do believe the REIT has a decent chance of regaining lost ground from here.

Today, it's trading at around 12 times its projected funds from operations. That's extremely favorable pricing considering larger more popular industrial REITs trade at ratios of 20 or more. Plus, it's one of the few monthly paying dividend REITs. At the time of this writing, it's paying a yield of around 5.25%. 

However, investors shouldn't discount Wall Street's recent volatility or what the extension of this bear market slide could do to STAG's share price. This REIT could continue to deliver growth in funds from operations and net income as anticipated, but still come up short in terms of its stock price performance while investors remain downbeat about the macroeconomic situation.

However, for those taking a long-term approach to investing, this could be an opportune time to pick up shares of STAG Industrial. It's a solid business in a high-demand and fast-growing industry that looks like it has nowhere to go but up. And at today's discounted price, it certainly looks like a juicy buy.