As the 2008-2009 recession and resulting bear market struck, the industrial real estate sector was hit equally as hard. Falling manufacturing output, high unemployment and slowing growth put pressures on the sector, and equities prices slid hard. However, fundamentals for the industrial real estate segment have begun to improve. Rebounding consumer spending, restocking of business inventory and increases in both U.S. exports and manufacturing production bode well for the sector. In addition, as broad-based real estate indexes, like the iShares Dow Jones U.S. Real Estate (ARCA:IYR), have surged over the last two years, the industrial real estate investment trust (REIT) sector has remained roughly flat. For investors, this value plus the improving fundamentals could make the sector a buy. (To help you breakdown the value of REITs, see How To Analyze Real Estate Investment Trusts.)
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Big Gains in Warehouses
According to the Commercial Real Estate Development Association, the industrial real estate sector should see a gradual increase in demand throughout 2012 in the United States, as the economy grinds forward. While there is some global economic uncertainty plaguing the market place, analyst's estimate that industrial REITS offer a compelling buy based on improving basics.
Overall, 2010 was a great year for the manufacturing sector and saw a return to growth. According to Moody's Analytics, since bottoming in the second quarter of 2009, industrial production has rebounded 11.8% through the third quarter of 2011. Similarly, economic activity in the manufacturing sector expanded in September for the 26th consecutive month, and the overall economy grew for the 28th consecutive month. September's PMI showed a 1% increase versus August's numbers, and currently sits at 51.6%. A relatively weaker dollar has benefited exports, and domestic consumer spending has risen 15.3% since bottoming out in 2009.
In addition, several key markets have finally begun to show positive rental rate growth, and over the last six months, nearly a billion square feet of space has been rented by tenants. New construction projects in the sector have generally been shelved, and should help bolster rental rates on existing properties. Overall, the National Council of Real Estate Investment Fiduciaries index of industrial properties realized a total return of 4.5% during the second quarter of 2011, and outperformed the group's broad measure of real estate. Despite the recent outperformance, the industrial sector still has the potential for gains as the economy improves. (For more on commercial real estate, read Find Fortune In Commercial Real Estate.)
With several positives facing the industrial real estate sector, investors may want to consider adding it to their REIT portfolio. While the iShares FTSE NAREIT Industrial/Office ETF (ARCA:FNIO) can be used, the fund only includes a 23% weighting to industrial REITs, and trades very infrequently. For investors, wanting to add the sector, individual REITs are best.
For investors wanting to focus on the behemoth in the sector, ProLogis (NYSE:PLD) offers a global approach with industrial properties across 22 countries. The mega REIT also boasts higher gross margins than its major competitors, PS Business Parks (NYSE:PSB) and First Industrial Realty Trust (NYSE:FR). Shares of ProLogis yield a juicy 3.3%.
However, smaller might be better. Recently IPO'd Stag Industrial (NYSE:STAG), has been snatching up single-tenant, class B properties in secondary markets throughout the United States at discounted rates. The majority of Stag's tenants are stable firms like ConAgra (NYSE:CAG) and International Paper (NYSE:IP). Shares of the Stag yield an impressive 8.4%.
Finally, for investors seeking high dividend yields in the middle of the pack, both EastGroup Properties (NYSE:EGP) and DCT Industrial (NYSE:DCT) offer a range of warehouse and industrial properties across a number of states. Shares of the firms yield 4.2 and 4.9%, respectively.
As the Great Recession took hold, the industrial real estate sector saw its fortunes fade. Now with industrial production and the economy grinding forward, many analysts believe the sector is ripe for the picking. The previous REITs, along with Terreno Realty (Nasdaq:TRNO), might be ideal ways to play the sector. (To help you value REITs, check out How To Assess A Real Estate Investment Trust (REIT).)
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