The steady growth of ecommerce is changing commercial real estate investors’ perceived value of the industrial sector as a high performing REIT. Of all the REIT sectors, industrial is the second smallest with eight publicly traded industrial REITs earning a total market cap of $28.1 billion.
Historically, the industrial sector has underperformed in terms of returns. “Despite what management likes to say, industrial space is generic, and you’re not going to get a massive premium during good times like you would for other property types,” says Paul Adornato, a REIT analyst with BMO Capital Markets. “Boom time in industrial is not like boom time in office and multifamily.”
However, last year, analysts identified that industrial REITs were outperforming the market at 7.4% versus 3.7%. This is attributed to a number of factors that all ladder back to an increase in ecommerce.
“Ecommerce is a big benefit for industrial REITs,” Adornato contends. “This is a very powerful shift, and it’s not a trend that’s going to end anytime soon. It’s long-term change.”
According to National Real Estate Investor, ecommerce had been steadily averaging gains of about 10 percent annually throughout much of the past decade, but those numbers have skyrocketed in recent years. Consumer behavior is changing so quickly, that supply chains are scrambling to keep up.
Regional distribution facilities now accommodate for more than 60% of the U.S. industrial inventory which directly links to the improved REIT returns. Retailers need more space to meet the demands of the growing ecommerce market. Often, that means shrinking store footprint and increasing warehouse space.
Renewed demand is pushing up rent prices to where they were pre-recession. Also adding to the increase in rent is developers’ cautionary approach to expansion. The economic recovery has been steady, but developers are still hesitant, approaching new projects slowly and strategically.
If you’re interested in the industrial sector of commercial real estate, talk to our Industrial Services Group. We can help you with government incentives, strategic planning and location advisory—one of the most important aspects of regional distribution facilities planning.