Post by
retiredcf on Jul 04, 2022 8:22am
CIBC Monthly Notes
Industrial REITs
1. Strong Demand Tailwinds To Continue: The sector is well positioned to deliver
above-average FFO growth in 2022E and 2023E on the back of strong rent growth. National
industrial real estate availability remains near all-time-record lows while net rent growth has
been accelerating. The formerly lagging market of Calgary has also benefited from strong
industrial space demand and we expect market vacancy to continue to improve in 2022. It is
also expected that e-commerce will continue as a positive driver for warehouse demand and
we expect absorption for industrial real estate to remain strong for the upcoming year and to
continue to outpace new supply, which, in turn, should support continued net rent growth.
2. The Path Of Cap Rates: Having compressed ~160 bps, on average, since 2018, industrial
cap rates stand out from the rest of the sector, which has not experienced such dramatic
moves. Exceptional rent growth, underpinned by low vacancy and low supply, has explained
much of the compression in cap rates. Further, institutional capital continues to pursue the
asset class, setting increasing benchmarks for valuation. Given the move in interest rates, we
expect cap rates could show some expansion, perhaps with a lag. However, we expect
continued rent growth momentum to offset part of the impact of rising rates.
3. Potential For More M&A: WPT was privatized last year at a ~38% premium to our NAV
estimate and the favourable M&A environment could continue in 2022. Further, Blackstone
made headlines with its acquisition of the Artis and Cominar industrial portfolios. Industrial
investment volume led all asset classes with ~$17.2B in 2021, up from ~$8.2B the prior year.
With ample dry powder in institutional hands allocated for industrial real estate (pensions,
private equity), we would not be surprised to see additional industrial M&A activity as the
sector continues to attract interest. We think any of the remaining industrial REITs in Canada
could be a takeout candidate depending on desired market exposure