Terreno Leases Newark Property, Sees Decent Demand

Terreno Realty TRNO is witnessing healthy demand for its properties. Recently, the company executed a lease for 5.5 acres of improved land in Newark, NJ. This lease with an automobile exporter commenced on May 16, 2024 and is slated for expiry in January 2028.
The demand for industrial real estate space has been high amid an e-commerce boom, growth in industries and companies making efforts to improve supply-chain efficiencies. Terreno Realty is also experiencing healthy demand for its properties.
TRNO's operating portfolio was 96.2% leased to 572 tenants as of Mar 31, 2024. For the company's improved land portfolio of 45 parcels spanning 152.4 acres, the leased rate was 94.6% as of Mar 31, 2024 compared to 94.6% and 98.9% recorded as of Dec 31, 2023 and Mar 31, 2023, respectively.
However, TRNO was able to lock in higher rents on new and renewed leases during the quarter. The cash rents on new and renewed leases climbed 47.2%. The tenant retention ratio was 54.7% for the operating portfolio and 82.5% for the improved land portfolio.
Per a Cushman & Wakefield CWK report, following two years of remarkable growth emerging from the pandemic, the U.S. industrial real estate market continues to cool off. Though tenant demand tapered off in the first quarter, it remains positive. The overall vacancy rate is trending higher as new completions continue to surpass net absorption.
However, though demand is moderating, it is not significantly plunging. There is new supply in the market, and vacancy rates are rising but at a manageable pace. Similarly, growth in rents is decelerating but remains solidly positive, suggesting a "soft landing".
There was healthy new leasing activity throughout the first quarter. With 128.7 million square feet (msf) of transactions completed, quarterly new leasing activity was 3% higher than the 10-year pre-pandemic average from 2010 to 2019. Absorption slowed in the quarter but remained positive, with net absorption coming at 13.8 msf, down from 48 msf in the prior quarter and from the 77 msf recorded a year ago.
The overall vacancy rate is trending higher as new completions continue to surpass net absorption. The overall vacancy rate climbed an additional 60 basis points (bps) to reach 5.8%, propelled upward for the fifth consecutive quarter by the influx of new speculative supply. Despite being elevated, vacancy remains below its historical average of 7%. There is a moderation in rent growth, and industrial rents grew 6% annually in the first quarter of 2024 compared with 10% in 2023 and 20% in 2022.

Conclusion

With a solid operating platform, a robust balance sheet position and strategic expansion moves, TRNO seems well-positioned to capitalize on long-term growth opportunities amid favorable industry fundamentals.
Nonetheless, the rising supply of industrial real estate, stabilizing e-commerce sales growth, persistent macroeconomic uncertainty and a high interest rate environment pose key concerns for the company.
Shares of Terreno Realty, currently carrying a Zacks Rank #3 (Hold), have risen 5.5% in the past month compared with the industry's growth of 7.5%.

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Stocks to Consider

Some better-ranked stocks from the REIT sector are Rexford Industrial Realty, Inc. REXR and OUTFRONT Media Inc. OUT, each carrying a Zacks Rank #2 (Buy) at present.
The Zacks Consensus Estimate for Rexford Industrial Realty's 2024 FFO per share stands at $2.34, which indicates an increase of 6.85% from the year-ago period's actual.
The Zacks Consensus Estimate for OUTFRONT Media's 2024 FFO per share is pegged at $1.71, which suggests 4.27% year-over-year growth.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.

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