How e-commerce is driving demand for industrial real estate
In 2016, Walmart became a top 10 tenant of industrial real estate investment trust (REIT) Prologis for the first time, largely as a result of its online sales platform.
As this shows, e-commerce is changing the game for industrial real estate, with important implications and opportunities for self-managed super fund (SMSF) investors.
Demographics, urbanisation, and technology
There are a number of global megatrends shaping the future of society and capital markets including the rise of digital technologies and globalisation.
These trends will help shape global listed real estate assets in the future. It’s important to understand the potential impacts, risks and rewards investors are likely to be exposed to thanks to these pervasive themes.
A quick primer
Real estate is an asset class that has intrinsic, functional value. It also naturally evolves as society evolves. A good example is e-commerce’s implications for industrial real estate.
Industrial is one of the big three commercial real estate classes, alongside office and retail. Industrial assets include warehouse space, manufacturing facilities, and distribution centres. Typically, these properties are leased to a single user, although they can accommodate multiple tenants, depending on the asset.
Industrial assets are low maintenance with limited capital expenditure requirements and mid- to long-term leasing structures of between three to five years. Ten-year leases are sometimes offered, particularly for specialised space.
These assets tend to have short construction periods of six to 12 months, and developers can respond quickly when demand for space rises. But at the same time, the risk of new supply is ever-present and must be monitored closely.
Trade volumes, retail sales, inventories, industrial production and manufacturing are some of industrial real estate’s drivers. As such, it is often viewed as a way of gaining exposure to assets whose values are increasing when economic growth also rises.
Clicks to knocks
In recent years, the rise of e-commerce has contributed to the buoyant industrial real estate sector.
In the US, e-commerce sales continue to grow as online-only businesses expand their market share and traditional retailers supplement in store sales with an online platform. Conservative estimates suggest e-commerce represents around 7% or US$350 billion of total US retail sales1
, which is predicted to reach 9% or US$490 billion by 2018.
There is a two-fold implication for industrial real estate. First, as e-commerce increases its share of overall retail spend, it becomes an ever larger and increasingly important demand driver for the sector.
Secondly, e-commerce produces unique and specific requirements for real estate assets given online and traditional retailers’ supply chains are very different.
The focus of e-commerce tenants on order fulfilment or “e-fulfilment” brings with it a much greater emphasis on speed of throughput over storage.
This translates into specific demands for these assets: closer proximity to population centres and shipping hubs, larger overall square footage (500,000-plus square feet), larger bay sizes, high ceilings and more parking space.
- Location matters because the value proposition centres on speed of delivery – the so-called “click to knock” timeframe.
- Size matters because e-commerce tenants require a disproportionate amount of space, due to the variety of goods and the more individualised (and thus inefficient) packaging.
- Clearance height matters because e-commerce tenants typically require multiple levels of storage.
- Parking matters because of the higher ratio of staff required for e-fulfilment hubs versus traditional warehouse space.
Given these requirements, most US industrial real estate built before 2000 is functionally obsolete for today’s e-commerce tenants.
Consequences for SMSF investors
The rise of e-commerce has begun to revolutionise industrial real estate. Over the property cycle, industrial landlords should therefore be in a stronger position to increase rents, given the expanded demand base supporting the sector.
The industrial REITs with exposure to large, contemporary, distribution centre-type assets in high barrier markets, overseen by quality management teams with insight into the needs of e-commerce tenants, will be best placed to deliver value in response to this structural shift.
Investors should therefore consider dedicated listed real estate managers with specialist expertise and on-the-ground coverage of industrial markets to unlock access to this and other market-defining trends of today.
1MWPVL International, 2016