JLL: Industrial, Retail Momentum Drives REITs

Real estate investment trusts are back in the limelight with increased returns year-over-year, led by industrial and retail REITs, reported JLL, Chicago. 

The all-equity REIT index returned 12.3 percent through the third quarter compared with the S&P 500’s 6.1 percent return. The industrial and retail sectors outperformed all other sectors with 31.1 and 13.1 percent returns through the third quarter, respectively.

“Improvements across the sectors in tandem is not a surprise when considering the impact of e-commerce and evolving traditional retailer strategies,” JLL said.

The industrial sector is on pace to see its second-largest year since 2008 in volume terms, JLL noted. And while the deals that drove the industrial market have ranged from single assets to large portfolios to single-market portfolios, one constant has remained: investors have a big appetite for Class A product.

That Class A product demand is not necessarily limited to primary markets, said JLL Industrial Brokerage and Industrial Capital Markets President Craig Meyer: “We see broad rental growth across nearly every market as vacancy reaches an all-time low. Institutional investors continue to view industrial real estate assets as highly desirable investment targets.”

Investors now look not only at primary markets such as Inland Empire, Calif. and central Pennsylvania but also to secondary markets such as Phoenix and Indianapolis, Meyer said. Phoenix led the way in total industrial space transacted for assets over 200,000 square feet in the third quarter as volume reached four million square feet in industrial assets.

Meyer said institutional capital will likely continue to pursue high-grade, long-term leased industrial assets as market fundamentals continue to improve. “We expect 2017 to be another exceptional year for everything from single industrial asset trades to regional and national portfolios,” he said.

In the retail sector, investors are still willing to pay a premium for high-quality product in primary markets, but secondary markets such as Las Vegas have also seen cap rate compression.

“Institutions have really pivoted toward investing in only the best assets when it comes to secondary markets,” said JLL Managing Director Chris Angelone. “This is causing some cap rate compression, especially as volumes overall remain depressed and Class B or C assets with higher cap rates aren’t trading as much.”

For example, secondary market mall volumes increased more than five-fold quarter-over-quarter, mostly driven by large Class A single-asset deals, JLL said. 

“REITs are finding success in these secondary markets, specifically with secondary core product, which has seen a considerable amount of volume,” Angelone said.