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CoStar Reports On Light Industrial Facilities: Demand Exceeds Supply, Bumping Rent Skyward

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CoStar Reports On Light Industrial Facilities: Demand Exceeds Supply, Bumping Rent Skyward

Last Wednesday, CoStar Group Inc (NASDAQ: CSGP)'s Randyl Drummer published an article detailing how the lack of supply of light industrial space in the United States is being reflected in rising rates for leases.

CoStar's research pointed out that major industrial developers, such as Prologis Inc (NYSE: PLD), have been building larger distribution/warehouse and e-commerce fulfillment facilities.

However, facilities between 100,000–300,000 square feet, which often house operations for small- to mid-size companies, are in high demand and are commanding rising rents.

Additionally, smaller "logistics" facilities, which support same-day delivery for retailers and manufacturing supply-chains, are also in high demand.

Related Link: Cowen Likes Industrial REIT Terreno Realty

One example of a smaller industrial REIT that actively is developing for this market is Sunbelt-focused EastGroup Properties Inc (NYSE: EGP).

egp_-_madison_ii__iii_tampa_construction.jpg
Source: EastGroup - Madison II & III Tampa, Florida

EastGroup has ~1.1 million SF actively being leased, ~1.1 million SF under construction and another 5 million SF available for future development.

Show Me The Money

Notably, during the first half of 2015, light industrial facilities had the highest year-over-year increase in rents at 5.7 percent, followed by logistics, office and apartments at 5.4, 4.0 and 3.9 percent, respectively.

"In fact, light industrial is so hot that even older, lower-functioning buildings – many located on infill properties in supply constrained markets like the San Francisco Bay Area, San Jose, Denver and Orange County – posted annual rent growth of 6.1 percent, the strongest rent growth within the entire industrial spectrum," according to Drummer.

These type of older, smaller, yet well-located properties often support "the last mile" for same-day deliveries.

A Big Fish In A Small Pond

Colony Capital Inc (NYSE: CLNY) CEO Richard Saltzman is now bullish on the sector, according to CoStar. During Colony's 2Q15 earnings call, Saltzman reported that Colony's light industrial platform was 90 percent leased with net effective rents on new leases and renewals averaging more than 10 percent above underwriting.

The Colony Light Industrial Portfolio (CLIP) owns 322 properties, totaling 34 million square feet, located across more than 25 U.S. markets. The multi-tenant properties can accommodate smaller tenants in the range of 10,000 to 50,000 SF.

clny_-_light_industrial_clip_map_aug_13.jpg
Source: Colony Capital

CLIP was very active during 2Q15, acquiring 13 facilities for $151 million, and subsequent to the end of the quarter, adding another seven acquired for $57 million.

Colony has a $2.5 billion market cap and acquired a ~$1.6 billion portfolio from Dallas-based Cobalt Capital Partners to build the foundation for this growing business segment.

Single Tenant Light Industrial

Another REIT following a similar strategy with a twist is Stag Industrial Inc (NYSE: STAG). Stag is an acronym for "single tenant acquisition group" and is actively acquiring light industrial and warehouse facilities across the United States in the 100,000 to 300,000 SF range.

Related Link: Is It Really Time To Sell Stag Industrial?

The Stag portfolio may benefit from the lack of supply in some of its markets when it comes time to renew leases. The company does not currently utilize a development strategy.

However, Monmouth R.E. Inv. Corp. (NYSE: MNR) is leveraging its relationship with FedEx to grow its portfolio by acquiring newly developed build-to-suits on long-term leases.

An Attractive Opportunity

According to CoStar research, "The national vacancy rate remains at 8.2 percent for logistics and 4.7 percent for light industrial for a combined 6.5 percent, much lower than at any point at the last cycle. CoStar projections call for logistics vacancies to remain extremely low for several years, rising to just 8.8 percent through 2019.

"Meanwhile, average lease rates for logistics property, which have risen by just 1 percent over history, spiked to a 4.6 percent average increase last year, and CoStar now expects another 5.5 percent bump this year before moderating in 2016 at a still-strong average hike of 2.7 percent.

"On the heels of a 4.7 percent rise in light industrial rents last year, CoStar projects another 6.1 percent annual boost in rents by the end of 2015, making the need for new construction a necessity."

Image Credit: Public Domain

Posted-In: Randyl DrummerAnalyst Color Long Ideas REIT Top Stories Trading Ideas General Real Estate Best of Benzinga

 

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