REITs are performing well these days, something that comes as no surprise to David Harker, executive vice president for the central region of First Industrial Trust.
Harker says that prices for industrial properties continue to increase. At the same time, demand for modern industrial facilities is on the rise, he says. Cap rates continue to be at record lows.
In other words, it’s a good time to invest in industrial real estate.
And it’s a particularly good time to invest in the Chicago-area industrial market, a market that Harker says is a strong one.
“The fundamentals in industrial real estate are very good,” Harker said. “That is why so many investors are looking at this sector. The vacancy rates in industrial are low. I’d say the industrial vacancy rate in the Chicago market is probably as low as it’s been since 2000. We have had 15 quarters of positive absorption. Rents are moving higher, especially in the Interstate-55 market. Why wouldn’t investors want to look at the Chicago industrial market?”
Harker also points to the industrial supply in the city and its suburbs. Developers have not overbuilt industrial projects in the recent past, Harker said. And they’re not overbuilding now.
Harker says that there was about 8 million square feet of industrial projects under construction as of early spring. About half of this new construction activity consisted of build-to-suit projects.
“So there has not been a lot of new supply in this market,” Harker said. “That has helped to increase demand and push rents and prices up.”
The numbers are good
Numbers from the National Association of Real Estate Investment Trusts — NAREIT — back up Harker. The association reported in its most recent outlook that REITs remain a solid source of income for investors.
According to the association, U.S. REIT returns strongly outpaced the S&P 500 in April, and significantly outperformed the broader equity market in the first four months of this year.
The FTSE NAREIT All REITs Index was up 2.88 percent in April, according to the association. At the same time, the FTSE NAREIT All Equity REITs index was up 2.99 percent while the FTSE NAREIT Mortgage REITs Index was up 1.86 percent.
And how did the S&P 500 perform in April? According to NAREIT, the S&P 500 was up during the month, but only by .74 percent. That performance pales in comparison to the returns generated by REITs during the month.
For the first four months of the year, the FTSE NAREIT All REITs Index was up 11.7 percent, while the FTSE NAREIT All Equity REITs Index was up 11.76 percent. During the same period, the FTSE NAREIT Mortgage REITs Index was up 13.23 percent. All three indices outperformed the S&P 500, which was up just 2.56 percent for the first four months of the year.
Industrial REITs performed well during the first four months of the year, too. According to NAREIT, although the industrial REITs it tracked actually saw their total returns drop slightly this April when compared to the same month in 2013, industrial REITs have shown a strong overall performance for the first four months of the year. NAREIT reported that returns on industrial REITs were up 10.44 percent during the first four months of 2014.
Harker said that First Industrial Trust has not purchased any industrial properties yet this year. The company, though, did add a Class-A bulk distribution facility of 627,000 square feet in Southeast Wisconsin during the fourth quarter of 2013. That purchase represented an investment of more than $26 million.
Mid-year in 2013, First Industrial Trust also purchased a 509,000-square-foot property at the busy and desirable intersection of Interstate-55 and Interstate-80 in the Chicago market.
First Industrial has been busy, though, on the industrial leasing side, Harker said.
“We are certainly in the market looking for high-quality distribution assets,” Harker said. “But so far, we have not found anything we really like in the Chicago market. Obviously, with prices going up, we are being even more particular with what we acquire.”
What is First Industrial looking for? Harker said that the company would like to acquire bulk distribution space that is less than 15 years old. Harker also prefers 32-foot clear heights and properties that have less than 3 percent of their space committed to office use.
Also on Harker’s wish list? Plenty of trailer parking.
“That is really big right now, really desirable,” Harker said. “People want excess trailer parking. They also want plenty of dock doors.”
Although First Industrial does a lot of investing in the Chicago market — Harker says that no market in the Midwest has a better supply of industrial assets than does the Chicago market — the company has also enjoyed recent success in the Minneapolis market.
“We are looking for a slightly different product in Minneapolis than we are in Chicago,” Harker said. “You don’t have the big-box distribution centers in the Minneapolis market like you have in Chicago. But we have been busy in Minneapolis during the last few months.”
First Industrial, for example, purchased an industrial facility in Minneapolis during the first quarter of this year, a 250,000-square-foot property for which it spent $13.4 million.