This past quarter hasn’t exactly been too kind to the traditional brick-and-mortar retail sector. Kicked off by Macy’s (M ) dour earnings report, many retailers painted a tale of woe. All stemming from big time drops in sales at the hand of online shopping.
But as they say, one sector’s pain is another sector’s gain.
Sure, online retailers such as Amazon (AMZN ) are the big winners. But when it comes to dividends, the real gain is coming from an often ignored segment of the real estate market. I’m talking about warehouses and industrial properties.
The industrial REITs have been riding high on the back of gains in manufacturing activity since the dark days of the recession. However, in recent months, online shopping has given the sector another boost. Together, they make a powerful combination that should help the industrial REITs keep on delivering throughout the year.
For investors, the boring industrial REITs could be one of the best places to find current income as well as a dose of growth.
We Want Faster Shipping
After taking it really hard on the chin back in 2008, the owners of industrial real estate have to be smiling now. The sector is up by more than 17% this year. Compare that to a 6% return for all equity REITs and just a 1.7% for the S&P 500, according to real estate researcher Green Street Advisors.
The reason? We’re buying more things online.
As consumer interest in online shopping has hit the tipping point and become more than mainstream, the owners of warehouses, flex space and other industrial properties are becoming unsung heroes. E-commerce firms are finding out that shipping goods from a website is a lot different than shipping goods from a single store.
For starters, online shoppers have become accustomed to faster shipping—thanks to Amazon and its Prime service. A recent survey by supply chain consulting firm AlixPartner found that U.S. consumers expect to wait an average of only 4.8 days for delivery. That’s down from the 5.5 days recorded just four years ago. What’s more is the survey found that shoppers are actually choosing where they shop based on shipping decisions. They want fast delivery, and they want it for free.
This is huge pressure for online retailers.
Demand for More Warehouses
To meet that fact head on, retailers are expanding their supply chain networks to accommodate shoppers’ wishes and gain sales. This comes down to simply having more warehouses in more places across the country. You need to have the same product sitting in a warehouse in multiple locations to ship it out fast. Industrial real estate giant Prologis (PLD ) estimates that for every dollar of online sales generated, online retailers need three times the amount of distribution/warehouse space versus traditional brick-and-mortar retailers.
This calculation holds water. A recent report by Green Street Advisors showed that inventory levels in industrial spaces have risen faster than sales since 2011. This is because you need to have the same product stocked and ready to go.
With that in mind, demand for warehouses has exploded. By the end of 2015, tenants in the top 47 markets of the country added 101.7 million more square feet to their leases. That’s on top of the 93 million square feet they tacked on throughout 2014.
Making a Warehouse Play
Given the new demand from online sales, the industrial REITs could be a great play. Already, we’ve seen some of the rise in e-commerce reflected in earnings reports. Both PLD and Duke Realty Corporation (DRE ) have noted online sales demand in their recent reports.
Prologis is by far the largest pure-play industrial REIT, owning more than 3,203 properties. Although its empire spans 20 countries, the firm holds a ton of warehouses here in North America. That in and of itself makes it a prime play for rising online sales. Also helping is that PLD counts Amazon and shippers FedEx (FDX ) and UPS (UPS ) as some of its chief tenants, which has contributed to its rising occupancy and rents over the past few years. It’s also boosted earnings, cash flows and its dividend. PLD yields 3.37%.
However, online shopping isn’t just about AMZN. There are plenty of smaller e-commerce firms as well. And smaller size means smaller needs. Industrial REITs Stag Industrial (STAG ), First Industrial (FR ) and EastGroup Properties Inc. (EGP ) offer higher yields for their smaller-sized portfolios of warehouses. However, investors shouldn’t confuse smaller with lower quality.
The Bottom Line
Although online shopping is creating some casualties among the traditional retailers, it’s providing plenty of growth to others. That includes the owners of warehouses and logistic spaces. The industrial REITs are at the forefront of the growth. For investors looking for strong dividends backed by real demand, the previous picks—along with DCT Industrial Trust Inc. (DCT ) —make ideal choices to play the sector.