Capitalization Rate Compression In Industrial Real Estate

Industrial Real Estate – REITS And Cap Rates

Sourced through from:

The biggest market capitalization industrial REITs continue to see compression in cap rates, a metric real estate investors use to estimate potential return on properties — the lower the cap rate, the higher the property valuation.

If you own REIT stocks, you will want to buy or develop properties at high cap rates, expect cap rate compression and consequent property value increase, and hope the share price will reflect that appreciation.

Before the release of Q2 results, Patrick Maloney, from Circle Industrial, has indicated that now is a good time to tap into the “compression movement.” As he pointed out, “Operational metrics continue to strengthen… yet current stocks are lagging.”

Mr. Maloney adds: “As yields continue to compress on the most obvious, conservative investments, the money is looking to other avenues to garner additional yield. Cap rates have been compressing moderately in class B assets and in secondary and tertiary markets…” That is one reason why people have been bullish about STAG Industrial.

Industrial REITs said about cap rates in Q2 earnings results:

  • STAG Industrial, which operates majorly in secondary markets in 37 states, acquired 12 industrial buildings consisting of 1.6 million square feet for an 8.4 percent cap rate, with properties in the acquisition pipeline also in that range. They have seen some compression since cap rates for acquisitions dropped from 9 to 8 percent over the past years. Development has been limited since they are extracting goods value from acquisitions.
  • First Industrial has seen 5 percent cap rates for 2015 acquisitions — definitely down from 6-7 seen last year — 7 percent development and (high) 4 percent property sales.
  • Prologis, which operates in the United States and overseas, has witnessed continuous cap rate compression in Europe for the past two years.
  • EastGroup, which operates in the Sunbelt states, has experienced continuous compression, particularly in acquisitions.
  • DCT Industrial, which operates large distribution centers in numerous US markets, believes cap rates are flattening but can see further development yield compression.

Curated by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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