Experts Expect a Lot
From Industrial REITs
NEW YORK -- Real-estate pros have a message for investors still unsure about the economy and casting about for investment tips: Stash that cash in a warehouse.
An industrial warehouse to be exact. This niche of the real-estate market -- along with similar space, distribution facilities -- have weathered through the stormy economy much better than the general real estate market, and they're expected to be among the first to rally when the economy bounces back.
Industrial real-estate investment trusts delivered total returns of 29% in 2000, 7% in 2001, and 17% in 2002, according to the National Association of Real Estate Investment Trusts.
So far in 2003, they've advanced another 20.7%, which is a healthier clip than the S&P 500's 17.8% return. However, it's short of Nasdaq's 42.7% return and the equity REIT market's 23% return. But many investors are betting that the sector will rally again over the next year as the group is widely expected to benefit from an economic rebound.
Office and apartment REITs need job growth to bounce back. But not so for industrial REITs.
It's industry production -- not jobs -- that will dictate this group's rebound. As demand for consumer products and other items increases, so will demand for warehouse space. And industry production tends to accelerate long before job growth does, noted Sherry Rexroad, senior director and portfolio manager of Clarion CRA. As a result, industrial REITs will likely rebound earlier than office or apartment REITs.
Clarion has been boosting its investment in industrial REITs over the past month or two in anticipation of a rebound and rally in this sector. Ms. Rexroad anticipates returns of 10% to 12% over the next year, and more than 12% in 2005 and beyond.
Deutsche Bank analyst Louis Taylor recently upgraded three names in the sector -- AMB Property Corp., Duke Realty Corp. and CenterPoint Properties Trust -- to buy from hold, and reiterated his buy rating on ProLogis on his belief that the stocks will rally.
How much the group will rally is up for debate. Some believe the rally is already priced into the group's stock price while others disagree.
"There are signs that a recovery is taking hold, but it's not taking hold as fast as reflected in the share values," said Richard Imperiale, portfolio manager, president and founder of Uniplan Real Estate Advisors Inc. Still, Imperiale has been increasing his investment in industrial REITs over the last couple of quarters. His top pick is AMB Property.
Ms. Rexroad said Clarion pulled back at the beginning of 2003 because valuations were expensive. However, the group has since fallen back, lagging the REIT index, making them attractive again, she said.
Many investors began migrating to other REITs that had been more severely beaten down, causing industrial REITs to underperform the REIT index in 2003. However, as the market realized the economic rebound was further off than thought, they began returning to the stable and secure industrial REITs in the latest quarter, resulting in an 8% pop in the stock price, Mr. Taylor said.
Data from the Institute for Supply Management, or ISM, which measures industrial manufacturing, indicates that production is on the upswing. The index turned positive in July and has been steadily rising ever since.
"With the economy recovering, we should see additional pickup," said Michael Torres, president of Lend Lease Rosen, who has overweighted his portfolio with industrial REITs all year.
Mr. Torres said he's noticed more people reentering the industrial market as leasing inquiries have accelerated over the last quarter. However, the inquiries have not yet translated into leases being signed, he cautioned.
He holds shares in Catellus Development Corp., ProLogis and AMB Property.
Although Mr. Taylor believes the rebound has been factored into many of the REITs' stock prices, he sees further multiple expansion for stocks such as ProLogis and CenterPoint.
Jim Sullivan, a buy-side analyst with Green Street Advisors of Newport Beach, Calif., is more bearish. "We've seen no evidence in the second quarter that the demand side is improving whatsoever," he said. Although the ISM index has been positive, "we're yet to see it translate into demand for industrial real estate."
Mr. Sullivan sees Catellus, which is in the process of converting to a REIT from a C-Corp., as the name offering the most upside potential.
He also likes Prologis, with its international reach, and CenterPoint, with its savvy development plan and management team. However, he noted that ProLogis and CenterPoint are trading at hefty premiums to their net asset values, or NAVs, of 30% and 40% respectively.
Michael Winer, portfolio manager at Third Avenue Funds, is in it for the long haul. He sees Catellus and ProLogis outperforming other industrial REITs over the next three to five years.
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