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Shrug Off Rate Hike Fears, Industrial REITs Are Set to Grow

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If the rate hike in March and projections for the number of increases this year and in the next have made investors skeptical about their investment in the REIT industry, then perhaps this is the right time to reconsider.

This is because total returns from REITs not only rebounded in March, but also outshined the S&P 500’s gain. Particularly, according to REIT.com, the broadest index of the U.S. REIT industry — the FTSE Nareit All REITs Index — locked in a gain of 3.74% in the month, while the S&P 500 incurred a loss of 2.54%.

While REITs’ dependence on debt for business and the fact that these are considered bond substitutes, for their high and consistent dividend-paying nature, made investors skeptical, it seems that they are now thinking otherwise. Rather, they are emphasizing individual market dynamics which end up playing a crucial role in the performance of REITs.

For example, take the industrial REITs which registered 4.59% growth in March. Per a study by the commercial real estate services firm — CBRE Group Inc. (CBRE - Free Report) — availability fell for 31 straight quarters to 7.3% for the U.S. industrial market in first-quarter 2018. The figure not only marked a contraction of 6 basis points (bps) sequentially, but also shrunk 20 bps year over year, on average, across 50 markets that are followed by CBRE.

Admittedly, this asset class is witnessing improving fundamentals amid economic recovery and growth of e-commerce business. This is driving demand for warehouse space as companies are compelled to enhance and renovate their distribution and production platforms.

Particularly, with a larger customer base, e-commerce boom and heightened urbanization, companies are shifting their strategy toward services like same-day delivery and other such options, propelling demand for modern distribution facilities. Also, last-mile properties are witnessing a solid rise in asset values.

And why not! According to a report from Prologis Inc. (PLD - Free Report) , for a given level of revenues, online retailers require three times the distribution-center space compared with traditional retailers. This is surely spurring demand for industrial space.

In fact, despite supply picking up pace, demand remains robust, creating scope for rental rates to grow in several markets. This is offering significant impetus to industrial REITs like Prologis, Duke Realty Corp. (DRE - Free Report) and Liberty Property Trust (LPT - Free Report) to flourish.

Further, a healthy manufacturing environment, a recovering economy and job market gains are likely to drive demand from other sectors besides e-commerce. So, shareholders of such REITs have sufficient reasons to rejoice.

Currently, Prologis, Duke Realty and Liberty Property Trust carry a Zacks Rank #3 (Hold) and have a projected growth rate of 4.6%, 4.4% and 6%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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