The two BAS analysts say they continue to recommend a focus on companies with solid management teams, clean balance sheets, high-quality, well-located assets and strong, low-risk growth profiles. Of the company's top five REIT investment picks for 2008, only two, San Francisco-based AMB Property Corp. and Glendale, CA-based Public Storage Inc., come from the industrial and self-storage sectors.

The summit featured four panels with executives from companies in the two sectors. Some of the panelists included Stuart Brown, CFO of DCT Industrial Trust; Matthew Cohoat, executive vice president and CFO of Duke Realty Corp.; Michael Brennan, president and CEO of First Industrial Realty Trust; Charles Sullivan, managing director–North America operations for ProLogis; and Dean Jernigan, president and CEO of U-Store-It Trust.

Summing up the main conference findings, McElroy and Germain say:

The outlook for self-storage fundamentals is cautiously optimistic. The self-storage REITs have historically continued to grow revenues through previous recessions, with supply issues being the primary reason for deterioration in the past. The current supply/demand balance remains favorable, as new construction has been limited, and average internal growth of 3% to 4% for '08 is reasonable. The downturn in the housing market has had little impact on the self-storage industry.
Changes in the credit markets have altered the transaction environment. With the CMBS market dried up, borrowers have turned to short-term, floating-rate bank debt to finance growth. Underwriting standards have changed, however, with wider spreads, 30-year amortization replacing interest-only leverage and in-place cash flows replacing pro forma growth projections. Cap rates are expected to continue to rise given prospects for negative leverage, while transaction volume has slowed substantially. More of a distinction is being made for asset quality.
Global demand is detached from economic growth. Demand for bulk industrial product outside the US is less tied to GDP and more connected to the reconfiguration or maturation of the supply chain. Emerging countries are seeing a build-out of the supply chain resulting from a growing middle-class and product obsolescence, while mature countries are seeing a wholesale reconfiguration of the supply chain primarily from infrastructure improvements and a shift in where goods are manufactured and consumed.
US industrial management teams are cautious regarding '08 performance. Given potential macro-economic headwinds, they favor a measured approach. Though leasing prospects are down and location decisions have slowed, fundamentals remain compelling as demand continues to be strong across all product types. Lack of liquidity in debt markets has caused both local and national developers to slow growth plans, which should favorably impact supply. Given attractive yields and softer costs due to the slowdown in housing, the market is likely to see continued focus on development.
There is a flight to quality. Cap rates for Class A industrial product in core markets is up as much as 25 basis points, as institutional investors continue to pay premium prices for stable, well-located assets. Lower quality assets in slower-growth markets have seen caps rise 50 basis points.

Instant Insights /

Summit Sees Modest '08 for Industrial, Self-Storage REITs

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