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Real estate stocks have been lagging the market, but here is one corner in particular where Janus Henderson sees an underappreciated opportunity. Overall, real estate stocks have started to rebound, with the S & P 500 real estate sector rallying 10% over the past month. However, it is one of the worst-performing sectors in the index year to date, up about 5% compared to the S & P ‘s 19% gain through Thursday. Still, there is one area that has fared worse than many of its counterparts: industrial real estate investment trusts. Greg Kuhl, a portfolio manager in Janus Henderson’s global property equities team, thinks that is going to change. “Supply is going to be falling off really dramatically towards the second half of this year and into next year — and it seems like demand in the right product types and the right submarkets is holding up just fine,” he explained. “There’s some really interesting opportunities.” REITs can also pay out attractive dividends. .SPLRCR YTD mountain S & P 500 Real Estate Sector year to date As its name implies, industrial REITs own, manage and rent out space in industrial facilities. The benchmark Janus uses for the overall REIT sector is the FTSE Nareit Equity REITs , which tracks commercial real estate across the U.S. The index has seen a total return just north of 7% year to date, as of Thursday. However, its industrial REIT index has a total return of -0.75% so far this year. The industry took a hit in April after industrial property giant Prologis cut its full-year outlook , citing economic uncertainty and delayed leasing decisions. However, in July, the company raised its full-year guidance . Meanwhile, construction data shows that supply will be diminishing, Kuhl noted. That said, he is being selective within the subsector. “In our view, supply/demand fundamentals are more favorable in the Sun Belt and Midwest markets today as compared with coastal markets, especially California,” he said. California is the largest industrial market in the U.S., he added. One of his largest industrial overweights is EastGroup Properties , which has exposure to the Sun Belt. The company, which has a dividend yield of 2.69%, owns smaller building sizes. “Some of the Sun Belt markets, as we all know, there’s population growth and the product that EastGroup group owns, you could call it ‘last mile industrial’ — closer to where people live, they’re smaller — there’s a lot of demand for that,” Kuhl said. “You’re not just trying to lease to Amazon or FedEx … you can also lease to lots of small businesses that are based locally.” EGP YTD mountain EastGroup Properties year to date Another name Kuhl likes is First Industrial Realty Trust , which has national and coastal exposure and is trading at a significant discount to its peers, he said. The stock has a 2.69% dividend yield. While the company has a lot of properties in California that are not yet leased, it has an advantage in that the buildings were done at a really low-cost basis, he noted. “They can go out and charge a market rent for a building that’s currently vacant and, all of a sudden, it’s generating income for them,” Kuhl explained. “We don’t think that’s priced into the stock.” FR YTD mountain First Industrial Realty Trust year to date He is also encouraged by the initial public offering of Lineage , which started trading July 25 on the Nasdaq. It is the market’s largest IPO so far this year. Lineage, ranked No. 46 on the 2024 CNBC Disruptor 50 list, is the largest temperature-controlled warehouse REIT in the world. “Cold storage is a specialized area within industrial that we like and where supply/demand fundamentals are also more favorable than coastal traditional industrial,” Kuhl said. The stock is up more than 10% from its $78 IPO price, as of Thursday’s close. “This is a positive sign for industrial REITs and just REITs in general,” Kuhl said.
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