Major industrial real estate players are seeing high occupancy rates and increased revenues at the start of 2023, but a flood of new supply and financial concerns are causing some to predict a stabilization period, according to a recent industry report by Bisnow. Companies like Prologis, First Industrial Realty Trust, Rexford Industrial Realty, EastGroup Properties, and Stag Industrial all reported occupancy rates around or above 98 percent, levels that analysts describe as near-historic.
According to Green Street analyst Jessica Zheng, demand has normalized compared to the past two years, but is still healthy. However, with an estimated 663 million square feet under construction nationally, executives are warning of increasing vacancy rates as new supply is delivered.
Despite the anticipated slowdown in demand, the drop in new development projects could offset the wave of new supply set to come online soon. Prologis expects a decrease in demand as occupiers delay decision-making amid economic uncertainty. However, this slowdown could align with a drop in new deliveries, which could ultimately benefit industrial property owners. First Industrial Realty Trust CEO Peter Baccile predicts vacancies to decrease back to current numbers or even lower around late 2024.
Although a commensurate spike in vacancy rates could occur nationally, it is likely that these REITs might be insulated from it, given the markets in which they operate, stated the report. For example, Rexford, which focuses on supply-constrained Southern California, could be in a good position to handle a slight increase in space availability.
The start of the year saw increased revenues across the board for major industrial REITs, reflecting sustained high occupancy and stable rental rates. Prologis’ revenue was up 45 percent compared to the previous quarter, reaching $1.77 billion, while First Industrial, Rexford, EastGroup, and Stag Industrial all saw quarterly revenue gains of $15 million to $20 million.
Although some REITs reported lower profits year-over-year, funds from operations per share, an important measure of financial fitness for REITs, have generally increased. For instance, Prologis saw a 60 percent decrease in net earnings in Q1 2023 compared to Q1 2022, dropping from $1.2 billion to $463 million. However, Prologis’ funds from operations per share rose to $1.22 in Q1 2023 from $1.09 in Q1 2022. Stag Industrial’s net income at the end of Q1 2023 was $50.6 million, a decrease from $54 million in the same period the previous year. However, its core funds from operations per diluted share increased by 3.8 percent, rising from 53 cents in Q1 2022 to 55 cents in Q1 2023.
