By now, everyone knows that e-commerce globally is growing faster than traditional retail sales. E-commerce sales around the world are expected to double over the next five years alone.
If we narrow our focus solely to the U.S., forecasters say e-commerce will account for 30% of all retail sales by 2030. In 2015, some 7% of U.S. retail sales were online, with 205 million online shoppers.
But most people don’t give a second thought to what happens every time you click the buy button. The item you ordered goes through real brick-and-mortar warehouses and distribution centers before it shows up at your front door.
That is leading directly to the reinvigoration of a once-sleepy part of the real estate sector – the owners of those warehouses and distribution centers – industrial REITs.
E-Commerce and Warehouses
Industrial REITs underperformed other REITs for nearly two decades prior to the last couple of quarters.
But it’s a whole new ballgame now. And it’s easy to see why.
Over the last several years, demand for industrial space such as warehouses has more than doubled. Fully 30% of demand for such spaces is now directly correlated to e-commerce. That percentage is likely to climb even higher in the years ahead, according to many industry observers.
That’s because an e-commerce companies require a lot more logistics space as their brick-and-mortar counterparts. At the end of 2015, tenants in the top 47 markets occupied 101.7 million more square feet than amount they did at the start of 2015. That gain even surpassed the gain in 2014 of 93 million square feet.
Even the brick-and-mortar retailers that are still around have ramped up their e-commerce efforts. These companies still require about 20% more warehouse and distribution space than their traditional stores to hold all the individual packages to be sent out.
Bryan Carlock of the consultancy PwC estimates that every $1 billion of e-commerce sales drives demand for one million square feet of industrial real estate.
The leader among industrial REITs, Prologis (NYSE: PLD), sees an even larger need for industrial space. It says that for every $1 billion in e-commerce sales, there is a need for three times the space of traditional retail.
That great news for Prologis and its peers. As its CEO, Hamid Moghadam, told The Wall Street Journal, “Even if retail sales in the economy stay constant, just a shift from stores to e-commerce is going to grow industrial demand.”
Industrial REITs Universe
Luckily for investors, the industrial REIT sector is an easy one to get their hands around.
It is the second-smallest subset of the REIT sector. There are only eight pure-play companies that are publicly traded. Their total market capitalization is under $43 billion.
The largest industrial REIT, by far, is Prologis, with a market cap of about $27.25 billion. It is up 20% year-to-date.
Other companies in the sector in order of descending market cap are:
- DCT Industrial Trust (NYSE: DCT), market cap $4.27 billion, up 26% YTD.
- First Industrial Realty Trust (NYSE: FR), market cap $3.25 billion, up 24% YTD.
- EastGroup Properties (NYSE: EGP), market cap $2.32 billion, up 26% YTD.
- STAG Industrial (NYSE: STAG), market cap $1.69 billion, up 27% YTD.
- Rexford Industrial Realty (NYSE: REXR), market cap $1.42 billion, up 31% YTD.
- Terreno Realty (NYSE: TRNO), market cap $1.26 billion, up 19% YTD.
- Monmouth Real Estate (NYSE: MNR), market cap $868.5 million, up 33% YTD.
As their stock performance indicates, Wall Street is finally catching on to their true potential, thanks to the growth in e-commerce.
If I had to pick just one company in the sector, it would be Prologis. Its operating portfolio consists of nearly 3,347 industrial properties and has approximately 666 million square feet that is owned, managed or under development.
Its reach is global too with facilities in 20 countries spanning four continents. Prologis is exposed to countries that account for 70% of the world’s GDP. This includes fast-growth areas such as Asia where Prologis owns 55 million square feet of space.
It has more than 5,200 customers worldwide. Among its largest customers are familiar names like Amazon.com (NASDAQ: AMZN), Wal-Mart Stores (NYSE: WMT) and Home Depot (NYSE: HD). Prologis’ global occupancy rate for 2016 is estimated to be 95.7%.
For dividend investors, the good news is that Prologis has been raising its dividend annually since 2013. The current yield is 3.25%.
With the e-commerce boom set to continue, the Prologis dividend should continue to increase in the years ahead. That makes Prologis a way for even income investors to play the e-commerce boom.