Industrial REIT Demand – Remaining Ahead of Supply, But Slowing Down - TRNO, REXR, MNR

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Industry Report – Industrial Demand – Remaining Ahead of Supply, But Slowing Down    

·         Industrial REIT deep dive – surveyed top 25 markets meaningful to industrial REITs (capture average ~80% sq. ft. in these markets) from the perspective of rent growth relative to occupancy, demand (as measured at the MSA level by changes in goods producing employment), and supply (both existing and under construction) in order to determine the primary drivers of rent growth over the past year,  those markets which are showing accelerating (or decelerating) fundamentals as we look into 3Q16 and beyond, and what that means for industrial REITs (both under coverage and non-covered) in order to project 2H16 and FY17 rent growth trends.

·         Our analysis has found that industrial demand is remaining ahead of supply for all REIT portfolios ($50B market cap sector) but showing some deceleration.  Rent growth remains more a function of tight occupancy than demand, but both are intertwined, with a break point at about 94%. 

o   Basically those at 90% but strong demand still lagging, while rent growth with demand once hit 94%.  Some markets (LA, SF) have very high occupancy (97%-98%) and, with demand, seeing huge increases (SF +17%) while LA is seeing weak demand but tight occupancy keeping rent growth high (8%+)

·         Useful piece for industrial REIT investors – identify top markets (SF is tops, Orlando, Denver, Jacksonville, and Nashville all look poised to see tightening fundamentals).  Texas markets all look like getting overbuilt relative to demand (Houston, Dallas and San Antonio) while Inland Empire supply growth gives us some pause.

·         Bottom line here is with the sector running at 3.8% SS NOI YTD and trading at 103% of NAV good values here, especially Terreno Realty Corporation (TRNO-$26.32, Buy), which we believe will have the most attractive underlying fundamentals of any industrial REIT for the foreseeable future and trades in line with our $26.41 NAV, while Rexford Industrial Realty (REXR-$21.99, Hold) is seeing below average demand substantially offset by very high market occupancy, while our analysis is less germane to Monmouth Real Estate Investment Corp. (MNR-$13.51, Buy) given its lease structures and build-to-suit focus but we remain enthusiastic given trading at 97% of NAV and given the visibility of its earnings growth and high quality tenant base.