Industrial real estate is having a moment. The industry has experienced impressive growth over the past decade, with industrial real estate investment trusts (REITs) as tracked by the National Association of Real Estate Investment Trusts (Nareit) providing an average return of more than 20%.
But over the past two years, things have completely taken off. Several long-term trends, including the accelerated growth of e-commerce and supply chain disruptions, are driving insane demand for this high-growth industry. Last year, industrial and logistics was the second-highest yielding REIT subsector behind self-storage, and it’s in a solid position to lead the market in 2022.
If you’re on the fence about diving into the world of industrial real estate, these three charts should change your mind.
1. Vacancy rates have hit all-time lows
According to a recent report by Jones Lang LaSalle, 2021 marked the first time that the national average industrial real estate vacancy rates fell below 4%. The average vacancy rate for the year was 3.8%, a testament to the insatiable demand for industrial space. A recent CBRE industrial report indicated the vacancy rate dropped even lower in Q4 2021, to 3.2%. Southern California, including the Inland Empire and Orange County, as well as Reno, Nevada: Salt Lake City; Central New Jersey; Charleston, South Carolina; and Boston all have vacancy rates below 2%.
2. There’s simply not enough inventory to meet demand
What’s driving record low vacancy rates? A diminishing supply and steady demand. Net absorption, which is the rate at which space is occupied, continue to outpace supply. In Q4 2021, 89.7 million square feet of new industrial properties were delivered, while 141.8 million square feet of space was absorbed. At year end, there were 467 million square feet under construction. This is among the highest level of active development for the sector historically, but it’s nowhere near enough to meet today’s demand. Retailers leased the biggest share of industrial space in 2020, but logistics and warehouse operators led the way in 2021. It’s projected that third-party logistics, which are companies that provide distribution, storage, transport, and fulfillment services to other companies, will make up 35% of all industrial leases in 2022.
Class A space, the highest-quality industrial buildings and much of it brand new, is seeing the highest demand right; new smart technologies require more space, all of which necessitates delivery of new construction. Even though developers are working at maximum capacity right now, supply should remain low in 2022, pushing rent growth higher.
3. Rent rates are climbing quickly
Limited supply and ferocious demand have created the perfect storm for rental rates to climb to record levels, with year-over-year rental rates jumping 11% in Q4 2021. This was the third consecutive quarter that rental rates increased 10% or more year over year on average nationwide, with some markets seeing much higher annual lease spikes.
Because of the lack of supply and long-term nature of industrial leases, it’s likely that lease rates will stay elevated in 2022. Meanwhile, tenants with leases coming up for renewal could be facing increases of 25% or more, making for huge potential gains for operators.
There are, of course, some headwinds, including inflation and supply chain bottlenecks, that could slow the rate at which the industry is growing. But there’s no question that today’s low supply and high demand means industrial REITs should continue to dominate the commercial real estate market in 2022.
After the broad sell-off in markets, a lot of high-quality industrial REITs are trading at discounts to their recent prices. Companies like Rexford Industrial Realty ( REXR 0.50% ), Prologis ( PLD 1.83% ), Duke Realty ( DRE 0.44% ), and Terreno Realty ( TRNO 2.46% ) are down anywhere from 15% to 21% year to date despite sustainable growth opportunities. With plenty of options for investors to choose from among industrial REITs, and with some trading at bargains, it might be the perfect time for long-term investors to jump in.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.