Suppose you're looking to capitalize on the ongoing transformation of the industrial sector. In that case, you may turn to industrial real estate investment trusts (REITs), as they provide opportunities for stable income through leasing industrial properties.
So, what are industrial REITs? More importantly, are industrial REITs a good fit for your portfolio? To help you answer these questions, let’s explore the key attributes, financial strengths and strategic positioning of some of the best industrial REITs available today.
What is an industrial REIT?
An industrial REIT is a real estate investment trust that owns, manages and develops industrial properties.
Often referred to as "warehouse REITs" because they commonly include warehouses, these REITs also contain distribution centers, manufacturing facilities and logistics centers.
Industrial REITs generate income primarily by leasing these industrial spaces to tenants, typically manufacturers, retailers, e-commerce companies and logistics providers.
The success of industrial REITs is often tied to the economy's overall health, as macro trends, supply chain dynamics and consumer spending behavior influence demand for industrial real estate.
Understanding industrial REITs
While industrial REITs focus on spaces crucial for manufacturing, storage and distribution, many other REITs offer exposure to specific segments of the real estate market:
- Residential REITs: Apartments, single-family homes and multifamily units
- Commercial REITs: Office buildings and shopping centers
- Retail REITs: Malls, shopping centers and individual retail stores
- Healthcare REITs: Hospitals, medical office buildings and senior living facilities
- Office REITs: Corporate offices and business parks
- Hospitality REITs: Hotels, resorts and vacation rentals
- Infrastructure REITs: Communication towers, pipelines and transportation facilities
- Specialty REITs: Niche areas such as timberland, farmland and prisons
- Mortgage REITs (mREITs): Real estate mortgages or mortgage-backed securities (do not own physical properties)
- Hybrid REITs: Multiple property types or investment strategies
The evolving landscape of global commerce shapes the industrial real estate market, such as the critical role industrial properties play in the supply chain.
The sector is resilient, adapting quickly to changing consumer behavior, technological trends and global economic shifts. An example of this is when e-commerce skyrocketed during COVID-19, and so did the demand for warehouse space. We are still dealing with lingering supply chain issues caused by the pandemic, which has resulted in many industrial companies wanting to keep more inventory on hand (requiring more warehouse storage) and, in some cases, even bringing their manufacturing facilities back to the United States.
Because many industrial REITs utilize long-term triple net leases (where the tenant is responsible for paying property taxes, insurance, maintenance costs and rent), they tend to generate steadier cash flow than other REIT types. This helps industrial REITs weather economic downturns and keep their costs down, especially compared to other types of commercial real estate.
Types of industrial properties within REITs
Many industrial properties, each with unique advantages and challenges, reflect the diverse needs of tenants in the industrial sector.
Warehouses
- Traditional: Provide basic storage facilities for goods
- Automated: Employ advanced technology for inventory management
- Cold storage: Equipped with refrigeration systems for perishable goods
- Last-mile: Strategically located near urban areas for quick delivery
A key component in industrial REIT portfolios, warehouses support supply chain efficiency by facilitating bulk storage, inventory management and easy accessibility. With their flexibility in adapting to different storage needs, warehouses are known for their versatility across various industries. But one of the most significant challenges for all types of warehouses is finding the right spot, as the competition for prime, strategic locations is fierce.
In addition, the need for large spaces and the increasing costs of automation and technology implementation can be difficult to manage.
Distribution centers
- E-commerce: Specialized for online retail distribution
- Cross-docking facilities: Minimize storage time by direct transfer of goods between carriers
- Regional: Serve specific geographic regions
- Fulfillment centers: Focus on order processing, packaging and shipping for online orders
- Logistics hubs: Centralized locations strategically positioned to optimize transportation and supply chain networks
Larger than warehouses, these centers meet the demands of e-commerce and achieve cost-effective and timely distribution as they streamline logistics through order fulfillment optimization and reduced delivery times.
However, high initial setup costs, advanced technology requirements and the need for strategic locations near transportation hubs pose challenges. Scalability and adaptability are crucial to accommodate changing market dynamics.
Manufacturing facilities
- Heavy manufacturing plants: Large-scale production of goods like automobiles
- Light manufacturing: Smaller-scale production or assembly
- High tech: Specialized in advanced technology products
- Cleanroom: Controlled environments for sensitive product manufacturing
- Research and development: Dedicated spaces for scientific research, experimentation and innovation
These spaces, designed for producing goods, may include assembly lines, machinery and specialized equipment. They contribute to local economies by providing jobs and supporting industries with customized infrastructure. It costs a lot to get these facilities up and running. Zoning regulations and the need for specialized layouts can be cumbersome, especially when changing manufacturing technologies and processes require ongoing facility modifications.
Flex spaces
- Office/warehouse flex spaces: Combine office and warehouse features
- Tech flex spaces: Cater to technology and research-oriented businesses
- Showroom flex spaces: Include space for product displays and customer interaction
Flex spaces are versatile properties that can be adapted for various uses, providing flexibility for tenants with diverse operational needs. However, balancing the requirements of different users within a single building can be challenging, and flex spaces may require adaptable layouts and utility infrastructure to suit a wide range of tenant demands.
Data centers
- Cloud: Support cloud computing services
- Enterprise: Owned and operated by individual companies for their data needs
- Colocation: Provide space for multiple tenants to house their servers
- Edge: Positioned close to end-users for low-latency data processing
Data centers house servers and computing equipment, supporting the growing demand for digital infrastructure and benefit from the steady income streams of long-term leases and the increased reliance on cloud computing, data storage and processing. However, high initial construction and operational costs, energy consumption, security measures and compliance with data protection regulations add a layer of difficulty. In addition, it may require frequent technological updates and investments.
5 industrial REITs to consider in 2024
Wondering where to put your money in the real estate sector this year? Look at our list of industrial REITs that stand out among the crowd. With the e-commerce boom showing no signs of slowing down and the industrial sector playing a pivotal role in the global supply chain, these REITs are positioned to ride the wave of opportunity, each offering a unique blend of portfolio strength, strategic positioning and growth potential.
Prologis Inc.
With a large market capitalization of over $90 billion, the largest industrial REIT — and one of the largest REITs in general — Prologis Inc. NYSE: PLD is a formidable force in the sector.
Prologis has a presence in over 19 countries and territories worldwide, focuses on high-barrier, high-growth markets and has a substantial footprint in key logistics hubs.
The Prologis REIT leases modern logistics facilities to a diverse base of approximately 6,700 customers across two major categories: business-to-business and retail/online fulfillment. Because the REIT has an investment management platform (that generates rental income and earns management fees) and a global development platform, it has grown faster than almost every other logistics REIT.
While Prologis has built a reputation for delivering consistent performance and generating value for its investors, monitor its analyst ratings as they can offer valuable insights into any shifts in sentiment that may impact the stock's performance.
Public Storage REIT
As the largest self-storage REIT and one of the largest industrial REITs, Public Storage NYSE: PSA, is a compelling choice for investors seeking a defensive income-producing asset.
As of November 2023, Public Storage's extensive portfolio comprises nearly 3,300 self-storage facilities with more than 238 million square feet of rentable space and two million customers. It also has a 35% interest in European self-storage REIT Shurgard Self Storage (Euronext Brussels: SHUR).
Public Storage acquires and develops new properties, which most of its industrial REIT peers do not. This strategy has paid off for Public Storage, which has earned higher investment returns on its developments compared to its acquisition over the years. Public Storage's dominant market presence ensures a reliable revenue stream, an attractive dividend yield for investors and consistent dividend payments.
Keep tabs on the Public Storage’s news feed and SEC filings as regulation changes could impact the company's operational framework.
Ares Management REIT
Ares Management NYSE: ARES is a relatively new player in the industrial real estate market, and it has a strong management team with a proven track record of success.
The company focuses on acquiring infill industrial properties in major metropolitan areas, with its portfolio comprising over 100 properties primarily concentrated in the East Coast and Midwest regions. These strategic locations in bustling urban centers set it up to benefit from the anticipated growth of e-commerce and other economic developments. And grow it has.
Over the last six years, Ares’s annualized return was 52%; in the past year, it was 77%. If you had held shares of Ares for the last 5 years, you would have gained a whopping 583%! Since Ares is newer to this sector, monitoring the company's earnings data and financial information for any signs of inexperience or instability is important.
Plymouth Industrial REIT
Plymouth Industrial REIT NYSE: PLYM is a reputable mid-cap industrial REIT with a strategic focus on light industrial properties. Most of Plymouth's properties are located in what the company calls the Golden Triangle, an area in the Northeast and Mid-Atlantic regions that contains over 70% of the United States population, is responsible for more than half the United States GDP, and where 90% of households live within a five-hour drive of primary intermodal facilities and inland rail ports. Speaking of ports, the Golden Triangle has more than any other region in the United States and encompasses five of the seven Class I railroads.
Plymouth's strong track record and impressive dividend yield make it attractive for investors seeking a regular income stream, but its financial performance has experienced some volatility in recent years. Monitoring the company's competitive landscape is critical to ensuring the REIT maintains its competitive advantage.
Dream Industrial REIT
Dream Industrial REIT OTCMKTS: DREUF is a Toronto-based REIT specializing in light industrial properties. As of September 30, 2023, Dream Industrial REIT owns, manages and operates a portfolio of 322 industrial assets totaling approximately 70.6 million square feet of gross leasable area in Canada, Europe and the United States.
Since September 2013, after accounting for dividends, the stock has returned 230% to shareholders. In addition to its massive gains, Dream also offers a dividend yield of 5%, attracting income-seeking investors. With these stats, it's unsurprising that Dream's analyst rating is a "buy" while most of its real estate peers are a "hold."
How to evaluate industrial REITs for investment
When performing due diligence on an industrial REIT, start with market research to understand local dynamics, supply and demand factors, vacancy rates and rental trends. Reading independent analyst reports, networking with local industry experts and leveraging their insights can also be very beneficial.
Don't forget about broader economic indicators, such as GDP growth and manufacturing trends, which can impact the industrial real estate sector.
Once you've done that, follow the guide below as you dig into company data to evaluate whether an industrial REIT fits your portfolio.
Review key financial metrics
- Funds from operations (FFO): Representing the cash generated from their core operations, FFO is a critical metric and you should look closely at the historical FFO trends.
- Dividend yield: A consistent and growing dividend is typically a good sign.
- Occupancy rates: High occupancy rates indicate strong tenant demand, so pay attention to historical trends and the current levels.
- Debt levels and interest coverage: Lower leverage and ample interest coverage indicate strong financial health.
- Net asset value (NAV): It's important to know the underlying value of an industrial REIT’s properties, and a trading price below NAV may present an attractive opportunity.
Assess management expertise
- Management team: A skilled and knowledgeable team is essential for effective decision-making.
- Corporate governance: Transparency and alignment of interests between management and shareholders should be present.
- Strategic vision: Make sure the growth plans, risk management strategies and alignment with market trends is on track.
- Historical performance: Management should have a track record of successfully navigating economic downturns.
Analyze the property portfolio
- Geographical diversification: Ensure the portfolio is mitigating any regional risks.
- Tenant diversification: A diverse tenant base reduces the impact of a default.
- Property types: Understand what properties are in the portfolio.
- Leases: Long-term leases and strong tenant credit quality contribute to stability.
- Site visits: Inspect the condition of the properties and assess their location and surroundings.
- Regulatory compliance: Properties should comply with regulatory requirements and environmental standards.
How to invest in industrial REITs
You can purchase shares of industrial REITs, REIT mutual funds or exchange-traded funds (ETFs) on major stock exchanges. You may also be able to access industrial REITs through your company's retirement plan, so check with your plan administrator to see what your options are.
Step 1: Open a brokerage account.
First, you'll need to open a brokerage account. Once you decide on which broker you would like to use, you can sign up online or in person at a branch location. The process is fairly simple: you'll need to supply basic contact information and personal details (like your Social Security number, income, occupation, etc.), and then you can fund your account and choose your investments.
Step 2: Research and analyze industrial REITs.
Utilize your broker's education and research tools to help you evaluate and analyze portfolios, geographical focus, property types, management teams, financial performance, dividend history and growth prospects.
It's also important to take the time to review the most recent earnings transcripts. Look for industrial REITs with a proven track record and a strong presence in high-growth sectors like e-commerce and logistics.
Step 3: Evaluate market positioning.
Consider how market positioning and property holdings align with the current and future trends in the industrial sector. Look for industrial REITs focusing on major metropolitan areas and regions experiencing rapid growth.
Step 4: Assess risk factors.
Evaluate economic cycles, market competition and regulatory changes that could impact performance.
Step 5: Diversify your portfolio.
Invest in a mix of industrial REITs with varying market focuses and risk profiles instead of choosing only one.
Step 6: Monitor your portfolio.
Your job isn't done after selecting and investing in an industrial REIT. You must monitor performance and stay informed about market trends and industry developments.
Pros and cons of industrial REITs
Understanding the benefits and potential drawbacks of industrial REIT investments before adding them to your portfolio is important.
Pros
The pros include:
- Steady income stream: The consistent rental income generated from long-term tenant leases provides a reliable income stream for investors.
- Growing demand: The growing demand for industrial properties has boosted industrial REIT performance, and some (like data centers) have benefited from technological advancements and the increasing use of digital services.
- Diversification: These trusts can provide exposure to different types of industrial properties.
- Professional management: Investors don't have to deal with the day-to-day responsibilities associated with real estate ownership.
- Attractive dividend yields: Competitive dividend yields make industrial REITs appealing for income-focused investors.
- Economic resilience: The need for storage and distribution of goods remains even during downturns, adding to the stability of industrial REITs.
- Liquidity: Because they are publicly traded, industrial REITs provide high liquidity, enabling quick access to investment funds.
- Lower barrier to entry: Investors can access the real estate market without significant capital or property management expertise.
- Inflation hedge: Rental income linked to inflation rates can act as a hedge against rising inflation.
Cons
The cons include:
- Interest rate sensitivity: Rising rates may increase borrowing costs for REITs and impact their profitability.
- Market volatility: Economic downturns or supply chain disruptions can affect industrial REITs' performance.
- Capital intensity: Developing and maintaining industrial properties can be capital-intensive, requiring significant upfront investment and ongoing capital expenditures.
- Dependency on economic conditions: A slowdown in economic activity can lead to decreased demand for industrial spaces, affecting rental income.
- Location risks: The success of industrial REITs is often tied to the strategic property location. Changes in transportation infrastructure or shifts in economic activity can impact the desirability of certain places.
- Tenant concentration risk: If an industrial REIT has a high concentration of tenants in an industry facing economic challenges, it could affect the REIT's overall performance.
- Tenant turnover: Lease expirations and tenant turnover can affect a REIT's cash flow and occupancy rates, and finding new tenants or renewing leases at favorable terms may be difficult.
- Regulatory and environmental risks: Compliance issues or remediation costs could impact an industrial REIT’s financials.
- Inflation impact: Inflation can affect operating costs and property values, and industrial REITs may face short-term challenges when passing increased costs on to tenants.
- Limited control: The company's management team determines property acquisitions, dispositions and other strategic decisions, not you.
It’s the REIT time to invest
The industrial real estate sector is ripe with investment potential right now. From strategically positioned warehouses to cutting-edge distribution centers, the companies that made our industrial REIT's list offer diverse opportunities for investors seeking growth and stability.
As the global economy continues to evolve, the role of industrial properties in supporting essential supply chain functions remains paramount. By considering the unique strengths of each highlighted REIT, you can make informed decisions to capitalize on the dynamic and promising landscape of the industrial real estate sector.
FAQs
Let's take a look at some common questions regarding industrial REITs.
What is the largest industrial REIT?
What is an example of an industrial REIT?
What does an industrial REIT do?
An industrial REIT invests in and manages warehouses, distribution centers, manufacturing facilities and other commercial spaces used for industrial purposes. Industrial REITs generate revenue through leasing these properties to tenants, such as logistics companies, e-commerce retailers and manufacturers. The rental income from the properties forms the basis for distributing dividends to the REIT's shareholders. Industrial REITs often focus on strategic locations, key industrial markets and well-suited properties to meet the demands of modern supply chain logistics and e-commerce.
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