The Real Deal Los Angeles

E-commerce fuels industrial REIT growth

Demand for industrial space rises as more and more people shop online

June 15, 2016 02:00PM

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A Walmart.com fulfillment center (Wal-Mart)

A Walmart.com fulfillment center (Wal-Mart)

Online shopping addiction seems to have an upside for industrial real estate investment trusts.

Thanks to the rapid growth of e-commerce, industrial REITs have been performing exceptionally well. Shares rose 17.3 percent this year — compared to 6 percent for all equity REITs and 1.7 percent for the S&P 500, according to Green Street Advisors.

The growth is driven by online retailers’ rising demand for distribution centers, the Wall Street Journal reported.

Tenants in the top 47 markets occupied about 102 million more square feet by the end of 2015 than in the beginning of that year, up from 93 million in 2014. 

In the first quarter of 2016, industrial REITs like Prologis and Duke Realty have posted strong earnings.

But beyond the numbers, investors are beginning to realize that online retail will be an irrevocable driver for industrial square footage demand, as online distribution usually requires more inventory space and logistics coordination than brick-and-mortar stores.

“If you look at major retailers like Wal-Mart, warehouses are set up to send truckloads of goods to individual stores,” James Connor, chief executive of Duke Realty, told the Journal. Online distribution centers, however, “are set up exactly the opposite,” he added. “Everything goes out in onesies and twosies.”

But it won’t always be smooth sailing for industrial property owners, analysts warn. Dimmed consumer spending would raise the vacancy and lower rents, and things may fluctuate as online distribution processes grow more sophisticated.  

On the other hand, retail REITs are also doing pretty well as modern mall operators such as Simon Properties thrive. In the past five years, as The Real Deal reported in the retail special market report, retail REITs have outperformed eight of the nine other types of REITs, including industrial, office, residential and mortgage. [WSJ]Cathaleen Chen