E-Commerce Means The Future For Investors Lies In Warehouses

Industrial REIT returns are poised to outperform every other REIT sector for the second year in a row.

Industrial REITs, such as Prologis, Rexford Industrial Realty and Terreno Realty all returned more than 16% in the past year, cruising past other types of real estate. They even beat their own peers in the Bloomberg REIT Industrial/Warehouse index, which enjoyed an 8.3% increase last year, Bloomberg reports.

By contrast, the 12-month return of the largest U.S. mall owner, Simon Property Group, was negative 9.7%. The BBG Office Property REIT Index was a negative 11.7%. Equity Residential and AvalonBay Communities, the largest apartment REITs, returned 0.35% and negative 8.5% over the past year, respectively.

Past performance is no guarantee of future returns, but the promise of e-commerce growth also promises to spur industrial-sector growth and healthy yields. Online shopping, currently at 10% of all retail sales but growing rapidly, is reconfiguring supply chains and spurring demand for warehouses that can handle the traffic.

E-commerce has taken a solid business and "turbocharged it," Prologis CEO Hamid Moghadam told Bloomberg. Online retailers not only require three times as much warehouse space as traditional retailers, but they also require logistical services that are highly sophisticated.

Besides a facility's ability to handle e-commerce goods, winners and losers in industrial real estate will be sorted out by location. Those near dense population centers will do better, since they will be better positioned to transmit goods over the last mile, replacing standard retail.

Currently, at Prologis e-commerce accounts for about 10% of revenue, but such space accounts for almost a third of its new developments and a sizable chunk (20%) of its leases.

The company is also undertaking out-of-the-norm developments to accommodate the growth of e-commerce. For instance, it is building a 589K SF multistory industrial facility in Seattle, Georgetown Crossroads, as a way of fitting e-commerce distribution capacity in an urban location. The property will be completed in September.

"Market conditions are right for construction," the company said in a statement upon the groundbreaking of Georgetown Crossroads. "Consumers increasingly expect rapid delivery of online orders ... These factors contribute to retailers and manufacturers choosing to place their e-fulfilment operations in urban locations, in turn reducing truck trips."