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Online Sales & Returns on the Rise: Industrial REITs to Gain

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It’s not a secret anymore how the e-commerce boom is redefining retailers’ marketing strategies, affecting their business model and keeping retail landlords on tenterhooks. But the same mode of retailing has also brought into limelight the once-lesser attractive real estate — logistic properties.

In fact, amid improving economy and better job market that have infused confidence among consumers of their well-being, buoying the spending tendency, the overall retail spending reached $850 billion during the 2018 holiday season, denoting 5.1% year-over-year growth. This, encouragingly, marks the highest level in six years, according to Mastercard’s SpendingPulse.

And more importantly, online sales surged to $110.6 billion this holiday season, indicating a 17.8% year-over-year increase. This upside is anticipated to send across positive ripple effects across the industrial real estate industry.

In fact, companies are putting immense efforts to improve and revamp their distribution and production platforms in order to support the thriving e-commerce business, address a larger customer base and boost urbanization. Retailers are focusing on faster delivery, which is propelling demand for modern distribution facilities. As such, demand for warehouses, distribution centers and other industrial property remains strong, and continues to surpass supply levels. Also, last-mile properties are witnessing a solid increase in asset values.

Furthermore, not only online sales, but also online returns are opening up scope for this asset category. This is because returns from the online sales platform are usually more than in-store sales. In fact, per a report from CBRE Group (CBRE - Free Report) , while traditional return rate for goods purchased from stores is around 8%, the same for online purchases is much higher at 15-30%, subject to product category.

This trend is eroding profit margins of retailers, as they are plagued with the challenge in processing and reselling the products. Nonetheless, this reverse flow of merchandise can be mastered with an efficient supply-chain network. The process is also propelling demand for purpose-built warehouses with arrangements chalked out especially for processing returns.

These will provide significant impetus to REITs in the industrial asset category, such as Prologis (PLD - Free Report) , Duke Realty (DRE - Free Report) , Plymouth Industrial REIT, Inc. (PLYM - Free Report) and Terreno Realty Corporation (TRNO - Free Report) , in the form of rent escalation, apart from high occupancy.

In fact such factors are giving reasons to the industrial REITs to rejoice. Per a study by CBRE Group, availability fell for 34 straight quarters to 7.0% for the U.S. industrial market in fourth-quarter 2018, denoting the lowest point since 2000. Furthermore, demand for warehouses surpassed the delivery of newly-constructed supply by around 6 million square feet, according to the report.

Additionally, with demand surpassing new supply, net asking rents increased 2.2% in Q4 to $7.37 per square feet — marking the highest level since 1989, per a CBRE report. Moreover, rents have climbed 7.4% year over year. This not only marks one of the largest growth rates in this cycle, but the figure has also surpassed the average annual growth rate of 4.3% since 2012.

Going forward, taking a recovering economy and the healthy job-market scenario into consideration, consumption levels will likely remain elevated. And a substantial rise in e-commerce business, healthy manufacturing environment and high business inventories are likely to drive demand for warehouse and logistics real estate. Added to this is the Fed Chair’s assurance to adopt a “patient” approach in raising rates in tandem with the evolution of the economy, rather than being too aggressive in its tightening measures.

Nevertheless, development activity is also picking up pace in this sector and the demand-and-supply gap reduced to nearly 6 million square feet of space in the Dec-end quarter from 9.3 million square feet in the third quarter. In addition, protectionist trade policies have an adverse impact on economic growth, as well as the industrial REIT’s business.

At present, Plymouth Industrial REIT flaunts a Zacks Rank #1 (Strong Buy), Terreno Realty has a Zacks Rank of 2 (Buy), while Prologis and Duke Realty carry a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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