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With Occupancy High, Industrial REITs Prepare For New Supply And The Vacancy That Comes With It

Some of the biggest names in industrial real estate saw 2023 start with a bang — think high occupancy and rising revenues — but a flood of supply coming online this year and the persistent specter of financial troubles are a reminder that boom times have passed and stabilization is in progress.

Prologis, First Industrial Realty Trust, Rexford Industrial Realty, EastGroup Properties and Stag Industrial all saw occupancy across their portfolios around or exceeding 98% — levels that analysts described as near-historic. 


“Demand has normalized from the crazy peaks that we saw in the last two years,” Green Street analyst Jessica Zheng told Bisnow. Zheng said some of the REITs “commented that the current level of tenant demand is similar to pre-Covid, 2019 or 2018 levels, which is still pretty healthy but just not as robust as we saw in the last two years.” 

But with an estimated 663M SF under construction nationally according to Cushman & Wakefield, many executives of these REITs warned of increasing vacancy rates as new supply delivers. 

Prologis, for example, anticipates a demand slowdown as occupiers pump the brakes and push decision-making into the next year in the midst of economic uncertainty. But that phenomenon may coincide with a dip in new deliveries, which could shake out in property owners’ favor in the long run.

The drop in new development projects is something that many of the companies’ executives highlighted as potential equalizers that could offset the wave of new supply set to come online soon.

First Industrial Realty Trust CEO Peter Baccile told investors in a Wednesday earnings call that in 18 major markets across the country, his company anticipates between 400M SF and 450M SF coming online this year alone. But he also expects as much as a 50% decline in new development that he expects will deepen. The end result will be vacancies coming back to current numbers or even lower around late 2024. 

“We think the dynamic is going to remain where it's a landlord market. We'll see a tick-up in vacancy in the short term, but we don't see that changing the leasing dynamic at all,” Baccile told investors, adding “we're obviously going to keep an eye on it.”

Even if vacancy were to shoot up nationally, it’s likely that these REITs might be insulated from a commensurate spike because of the markets in which most of them focus, according to Truist Managing Director of U.S. REIT Equity Research Ki Bin Kim. A company such as Rexford, for example, which focuses on supply-constrained Southern California, could be well-positioned to weather a little bump in space availability. 

“There's a lot of supply being built in the Inland Empire. Indianapolis, Vegas, Dallas, Phoenix,” Kim said. “Most of these markets also have a lot of demand. That's the tricky part: trying to understand what's going to happen when you balance supply versus demand.”

Revenues were up at the start of the year across the board for major industrial REITs, reflecting sustained high occupancy and stable rental rates.

Prologis’ revenue was up 45% compared to the previous quarter, reaching $1.77B. First Industrial, Rexford, EastGroup and Stag Industrial all saw quarterly revenue gains of $15M-$20M.

In the same period, only two of the REITs reported profits that were lower year-over-year. Prologis’ net earnings were down 60% from Q1 2022, from $1.2B to $463M in the beginning of this year, though its funds from operations per share, an important measure of financial fitness for REITs, rose to $1.22 for Q1 2023, up from $1.09 in Q1 2022. 

Stag Industrial’s net income at the end of the first quarter was $50.6M, a drop from $54M the same time the previous year, though its core funds from operations per diluted share were 55 cents, a 3.8% increase over Q1 2023’s 53 cents.