This article is republished with permission from REITCafe.
Strong growth in e-commerce is driving demand for industrial space. The U.S. Department of Commerce reported that e-commerce sales grew 14.5 percent between the first quarters of 2014 and 2015. Since 2000, e-commerce sales have increased an average of 19 percent annually, and sales in 2014 were $40 billion greater than in 2013, reaching a total of $304 billion. E-commerce has grown from less than 1 percent of total retail sales in 2000 to 6.5 percent of total retail sales during 2014. Most of these goods are shipped directly from warehouses to consumers.
The change in the way retailers operate has affected the location, size, and structure of warehouses. Goods quickly cycle in and out of the warehouse and are not stored for long. Instead of sending fewer, large shipments from warehouses to retailers, retailers today make many small shipments to individuals. To speed delivery, e-retailers need warehouses that are closer to population centers. Ceiling heights are also rising to accommodate the growing volume of products that must be accessed using automated warehouse systems.
| TREPP-i Survey Loan Spreads (50-59% LTV)* |
| This Week | Previous Week | Prev. Month | End 2014 | End 2013 | |
| Industrial | 150 | 152 | 146.6 | 138.5 | 170 |
| Multifamilty | 146 | 148 | 144.6 | 139.8 | 166.7 |
| Office | 153 | 154 | 154.8 | 148 | 175 |
| Retail | 151 | 153 | 146.6 | 139.8 | 175 |
| Average Spread | 150.00 | 151.75 | 148.2 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.14 | 2.15 | 1.8 | 2.17 | 3.04 |
Real estate investment trusts (REITs) like Prologis (PLD), whose $20.5 billion market cap represents 66 percent of the industrial REIT sector, are at the forefront of these changes. A recent Wall Street Journal article noted that PLD is raising the ceiling height to 40 feet (12 m) on a 1 million-square-foot (93,000 sq m) building in Tracy, California. The company has strong development and acquisitions programs. Its development pipeline totals 15.6 million square feet (1.4 million sq m) in the United States and 40 million square feet (3.7 million sq m) worldwide. In addition, last month PLD partnered with Norges Bank Investment Management (NBIM) to buy KTR Capital Partners for $5.9 billion. PLD will own 55 percent of the joint venture and will increase exposure in key distribution hubs like southern California, New Jersey, and Chicago.
Strong demand from a growing economy is fueling industrial REITs. The three largest industrial REITs posted occupancy near or above 95 percent during the first quarter. Their performance compared favorably to the overall market, where first-quarter occupancy stood at 93.1 percent, according to Cushman & Wakefield. Nationally, industrial occupancy is up from 92.3 percent one year earlier, and rents gained 2.7 percent to $4.62 per square foot ($49.73 per sq m) between the first quarters of 2014 and 2015, also according to Cushman & Wakefield.
Broad-based economic expansion and changing tenant needs have prompted an increase in new construction. Thirty-two million square feet (3 million sq m) were added during the first quarter, and at quarter’s end, 152 million square feet (14 million sq m) worth of new construction was underway, according to Cushman & Wakefield.
Despite healthy market fundamentals, industrial REIT returns lag the overall REIT industry so far in 2015. PLD slightly missed consensus estimates for first-quarter earnings per share, and REIT investors remain wary about future interest rate increases. PLD’s stock price has declined by about 6 percent so far in 2015, contributing to a –6.65 percent total return for the industrial REIT sector so far in 2015. Weak recent stock performance indicates that investors are approaching industrial REITs with caution in spite of the sector’s strong fundamentals.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com. ** - 10 yr. Treasury Yield as of 5/15/2015
