4 reasons why industrial real estate is unstoppable in 2022

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It may be 2022, but many of the forces that drove the economy in 2021 are still in the driver’s seat. The long-term upward trend in e-commerce is stronger than ever. The supply chain that gets products from websites to consumers is still not working well. Inflation is on the rise and the Federal Reserve will likely raise interest rates soon.

Luckily for us, there is an investment that can benefit from each of these forces, particularly industrial real estate, which includes properties such as warehouses, manufacturing facilities, and even marijuana grow operations. Industrial REITs (real estate investment trusts) have already been one of the best performers since the start of the pandemic, returning more than 57% through November 2021, according to Nareit. Three industrial REITs positioned to perform well in 2022 are: American Realty ( COLD -0.85% ), Prologis (PLD 3.57% )and Innovative Industrial Confidence ( IIPR 4.00% ).

Put on your headphones and let’s talk about industrial real estate.

Image source: Getty Images.

Growth of e-commerce

The growth of e-commerce is not a new phenomenon, but the pandemic has taken it to a new level. U.S. e-commerce revenue grew 48% between 2019 and 2021 and is expected to nearly double over the next four years.

Every time someone buys a book from Amazon or shoes from Zappos, the order has to be fulfilled somewhere. The more revenue e-commerce companies earn, the more they invest in new warehouses and distribution centers. This drives up the demand for industrial real estate.

It’s also important to keep in mind that not all e-commerce businesses need rudimentary warehouses. Much of the growth is coming from online grocery shopping. This is a trend that favors Americold Realty, which has cold storage facilities. Americold was one of the few industrial REITs to perform poorly last year – it is now around 30% below its 2021 peak. The company saw its occupancy rate decline in 2021 due of its customers’ labor shortages and had to reduce its profit forecasts accordingly. It has already overcome problems (it was founded 120 years ago) and it is still set to take advantage of long-term trends in the e-commerce industry and the growing demand for home grocery delivery.

Interest rate immunity?

Higher interest rates are a real estate investor’s worst nightmare. Investors have better return options. Buyers cannot pay that much due to the budget constraint of paying off debts. Developers are finding it harder to find financing for new properties.

Industrial real estate will not be hit as hard as other types of real estate. Not only is industrial real estate often purchased by seasoned companies with strong finances, but also because new e-commerce companies or REITs are buying industrial real estate and driving demand.

Prologis is the largest industrial REIT and should benefit from this demand. It owns 1 billion square feet of industrial space in 19 countries that are leased to 5,800 different customers. Despite its size, Prologis has grown its cash at a rate of 10% over the past five years and has a vacancy rate of less than 3%. It doesn’t have quite the same growth potential as the other REITs in this article, but it performs consistently and makes money for shareholders.

Moonshot Enterprises

You don’t typically look to real estate for explosive growth. But there are explosively growing industries that are looking for industrial real estate. Think cannabis and crypto.

Cannabis is a fast-growing business everywhere it’s legalized (and in many places where it isn’t). All of that marijuana has to be grown somewhere, and indoor grow facilities are one of the best and most efficient places to do it. Add to that the fact that many marijuana businesses can’t find a bank to hold their money due to federal regulations, and it’s easy to see the future demand for this industry. Why put $10 million under your mattress when you could buy another grow rig?

Innovative Industrial is the leading REIT in this niche. It buys facilities from experienced producers and leases them under long-term agreements. The REIT owns more than 100 properties with 7.8 million square feet in 19 states. If marijuana production continues to grow and is legalized nationwide, Innovative Industrial will have the expertise to grow rapidly with the industry.

Crypto is similar. It needs large facilities to develop (extraction of new parts). Most banks don’t yet know how to deal with it. And many early innovators have more money than they know what to do with. It is true that crypto is becoming greener and requires less space than before, but it still needs a lot. This will correspond to the demand for industrial real estate.

Supply and demand

In the end, it all comes down to supply and demand. Prologis recently reported a national vacancy rate of just 3.9% for industrial property. This means the supply is low. Meanwhile, each of the forces described above is pushing demand further and further away from pre-pandemic highs. This all adds up to more gains in industrial real estate – perhaps even if the rest of the market doesn’t cooperate.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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