INDIANAPOLIS—All three main sectors in the portfolio ofDuke Realty, one of the major REITs in the Midwestand Southeast, exhibited a great deal of strength in the firstquarter, leading Cowen and Company, aninternational equity research firm, to reiterate itsOutperform rating on the company's shares.

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The rising US industrial economy, especially the continuingexpansion of e-commerce, for example, should drive up rents andpush SSNOI growth within the Indianapolis-based DRE's industrialportfolio, the researchers wrote in a just-published analysis.Industrials comprise 59% of its NOI. Occupancy in DRE's industrialproperties was 95.2% at the end of the quarter, and tenants occupy97.2% of the buildings with more than 500,000-square-feet, whichcomprise 41% of its industrial portfolio. “At this level, DRE canprioritize rents over occupancy, and 1Q14 leasing spreads of 8.3%were the highest since the financial crisis,” the researchersnote.

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In the past few years, suburban office buildings have performedworse than all other real estate sectors, and provide 26% of DRE'sNOI. But during that time, the company shed its older officebuildings located in low-growth markets, the researchers wrote. Andof its current top five office markets, four saw increasedoccupancy in the past year and three had positive rent growth.Furthermore, “DRE is well positioned to benefit from growing demandfor class A office product in sunbelt markets like Raleigh, SouthFlorida and Nashville.

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Cowen and Company add that Ventas' recentacquisition of American Realty Capital HealthcareTrust for about $2.6 billion should make investors take a closerlook at DRE's MOB portfolio. “DRE derives 14% of its NOI frommedical office buildings, and has the youngest and most productiveMOB portfolio of its peer group,” and the MOBs included in theVentas deal had a 6.0% cap rate. “If we believe the VTR/HCTtransaction is a true reflection of market value, DRE's MOB assetsshould trade below a 6.0% cap rate.”

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However, the Cowen researchers say “we believe the VTRtransaction is a highwater mark for MOB valuations, and maintainour 6.25% cap rate for DRE's MOB assets.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.