The industrial real estate sector appears to have reached an inflection point and is poised to rebound next year as the sector normalizes post-pandemic, according to a research note from Bank of America Securities.
The sector grew as consumers, stuck at home during the pandemic, embarked on massive online shopping, partly fueled by stimulus checks. That led to increased demand for warehouses and fulfillment centers to keep up with the increase in business. Then, when travel restrictions were lifted, demand for goods slowed.
That weakening demand may be bottoming out after BofA’s leading one-year industrial real estate indicator declined month-over-month for nearly two years, BofA analyst Camille Bonnel said in a note to clients. While the analyst described the turning point, the note did not reveal the numerical values of the indicator.
“We view recent improvements as positive for industrial demand from late spring 2024 onwards,” he said.
The metric has a strong historical correlation with same-store GAAP net operating income growth for EastGroup Properties (New York Stock Exchange:EGP), Foreword (New York Stock Exchange:PLD) and Industrial Deer (New York Stock Exchange: deer), industrial REITs related to BofA purchases.
Note that over the past three years, the Real Estate Select Sector SPDR ETF (XLRE) and the iShares Clore US REIT ETF (USRT) have failed to keep pace with the S&P 500. EastGroup (EGP) came close, rising 28 % compared to the S&P’s 32% increase.
The BofA IndRel indicator identifies 10 variables that show a 12-month leading relationship with industrial real estate demand cycles. Inputs are divided into four main categories: consumption, trade/supply chains, construction and employment, with each key category weighting 25% of the indicator.
BofA analysts expected 2023 to “moderate from record levels of unsustainable growth in 2021/2022.” To date, market data is ahead of the indicator, but is directionally in line with its expectations of “moderating healthy trends.”
While BofA expects demand for industrial real estate to gain momentum, market conditions remained healthy overall. Prologis (PLD) forecast that vacancy rates will remain below 5% and construction deliveries (i.e. the supply of new industrial buildings) will decline by 35% in 2024, “both positives for homeowner prices.” “Bonnel said.
It also expects an acceleration in leasing spreads in 2024 as BofA Buy-rated REITs have lower prevailing rents at expiration compared to the second half of 2023. Meanwhile, real estate data analytics service REIS Moody’s forecasts market rent growth of +6% in 2024, or even the other way around.
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