This article is republished with permission from REITCafe.
Amazon announced last week that it has enhanced its delivery network by leasing 20 Boeing 767 wide-body freighter planes. The planes will move goods between areas with major fulfillment centers, enabling the company to speed up delivery and reduce shipping costs. Amazon’s evolving distribution model could lead the firm to further streamline the location of its major distribution centers that feed into smaller warehouses near urban centers for last-mile delivery.
Amazon’s announcement illustrates the growing importance of e-commerce, which is overtaking manufacturing as the driving force behind new demand for warehouses. In its sixth-consecutive year of double-digit growth, U.S. e-commerce saw sales grow 14.6 percent to $341.7 billion during 2015, according to the U.S. Commerce Department.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 175 | 177 | 178 | 163 | 138.5 |
| Multifamily | 172 | 175 | 185 | 168 | 139.8 |
| Office | 182 | 183 | 164 | 168 | 148 |
| Retail | 175 | 177 | 177 | 168 | 139.8 |
| Average Spread | 176 | 178 | 178.75 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.98 | 1.88 | 1.73 | 2.27 | 2.17 |
Increased sales and the drive toward faster delivery are generating strong demand for both regional fulfillment centers and smaller, more urban facilities for local deliveries. The flow of merchandise returns, which traditional warehouses are not designed to process efficiently, is also contributing to demand for warehouse space, as noted in the recent article “Swimming Upstream: Navigating the World of Reverse Logistics” by CBRE.
With the growth of e-commerce, manufacturing has become less of a bellwether for industrial markets. In fact, industrial market supply-and-demand fundamentals are strong in spite of slower manufacturing growth. February was the fifth-consecutive month during which the nation’s manufacturing sector contracted, as reported by the Institute for Supply Management. The slower growth can be attributed to a number of factors, including the volatile global economy, a strong U.S. dollar affecting exports, a seasonal winter slowdown, and low oil prices.
Nevertheless, industrial vacancy reached a 15-year low of 7.2 percent in the fourth quarter of 2015, down from 8.0 percent a year earlier, according to Cushman and Wakefield. Asking rents were up 4.2 percent during the year. New construction totaled 172.4 million square feet (16.0 million sq m) in 2015, up 18.2 percent from 2014, and an additional 180.5 million square feet (16.8 million sq m) of space was under construction at the end of 2015. Southern California, including the Greater Los Angeles and Inland Empire areas, led the nation in net absorption. Dallas/Fort Worth, Chicago, and Atlanta were other strong nodes of net absorption.
E-commerce-generated warehouse demand is not limited to domestic markets. The global e-commerce logistics market is expected to grow 9.7 percent annually through 2020, according to London-based market research firm Technavio. A rising middle class and greater internet access, particularly in developing countries, have led people to increase consumption of foreign goods, especially in markets like China with a growing middle class.
Healthy sector fundamentals are supporting industrial real estate investment trusts (REITs). Industrial REITs have posted a –0.28 percent total return so far in 2016, which is slightly above the –0.53 percent FTSE NAREIT All Equity REIT average and well ahead of returns for the NASDAQ, Dow Jones Industrial Average, and Standard & Poor’s 500.
Annual 2015 earnings for the largest industrial REIT, Prologis (PLD), beat consensus estimates, and the company announced expected 2016 funds-from-operations (FFO) growth of 14 percent. Yet the stock price is down 2.8 percent so far this year, in part because of broader equity market softness, but also because investors are concerned about PLD’s significant investment in China, where economic growth has slowed. Last month, PLD increased its investment in Prologis China Logistics Venture, a strategy that could prove to be prescient if growth continues as forecast by Technavio.
The proliferation of e-commerce is creating new demand for industrial real estate, both domestically and internationally, and is keeping markets healthy even as manufacturing activity slows.
* 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 3/11/2016.
