E-commerce gives boost to warehouse Reits

Washington

FORGET your fancy office towers. The future lies in warehouses.

But not just any old dusty depot. It's got to be big enough, smart enough and close enough to consumers. Pick right and you could beat the returns of every other kind of property this year.

Real estate investment trusts that specialise in industrial properties, such as Prologis Inc, Rexford Industrial Realty Inc and Terreno Realty Corp, are outperforming Reits that focus on malls, residential rentals and office buildings. The three companies all returned more than 16 per cent in the past year, crushing other types of real estate - and handily beating their own peers in the Bloomberg Reit Industrial/Warehouse index, which reaped 8.3 per cent.

It's all about e-commerce. Online shopping still accounts for less than 10 per cent of retail sales in the US but is reconfiguring supply chains and shaping the fortunes of warehouse landlords. Demand is especially keen in and around big cities, where online shopping has caught on fastest.

Those are the same places - New York, Boston, Chicago, San Francisco, Los Angeles - where land parcels big enough for the latest warehouses and loading docks are scarcest, and rents are highest. Online retailers require about three times the warehouse space of traditional brick-and-mortar stores, and more-sophisticated logistical services.

"E-commerce has taken a business that was already pretty solid and turbocharged it," Prologis chief executive officer Hamid Moghadam said in an interview. Among other differences, he said, "in a regular warehouse that supplies a retail store, you are dealing with pallets of goods that are moved around. In the case of e-commerce, there is a lot of packing and handling".

Consider the 12-month return of the biggest US mall owner, Simon Property Group Inc, at negative 9.7 per cent, and the BBG Office Property Reit Index, at negative 11.7 per cent. The two biggest apartment owners in the US by market capitalisation - Equity Residential and AvalonBay Communities Inc - respectively returned 0.35 per cent and negative 8.5 per cent in the past year.

Which industrial Reits win and which fall victim to the next economic downturn will depend partly on proximity to major population centres. "There was an old name for the last mile - it was called retail," Mr Moghadam said. "Instead of the facility being the last mile to your house, you were a mile from the retail store."

The Terreno Reit, which is in six US markets, and Rexford, focused on Southern California, are best positioned to increase rents, said John Guinee, an analyst at Stifel Nicolaus & Co, while Liberty Property Trust and First Industrial Realty Trust Inc are more "susceptible to a slowdown in the economy". Prologis, which like DCT Industrial Trust Inc and Duke Realty Corp has a national presence, can use its financial might to pick its spots, he noted.

At Prologis, the biggest industrial Reit, e-commerce accounts for about 10 per cent of revenue, 20 per cent of new leases and close to 30 per cent of new developments, according to the company. The dearth of land available for development in New York City prompted Prologis to snap up a 200,000 sq ft warehouse in the Bronx last year. It's also the reason the company is building a multi-storey facility of almost 600,000 sq ft in Seattle, a first in the US because it's hard to manoeuvre tractor-trailers above ground level.

"Multi-storey is very expensive" to build, said Bloomberg Intelligence analyst Lindsay Dutch. "Prologis is in a position to take these risks and do these projects. They've done it in Asia, with ramps for the trucks to the second floor, but the third floor is elevator access only, so you can't charge as much for that."

The high cost of land and construction in major urban centres like New York and Los Angeles has helped save industrial landlords from the mistakes common to office, retail and residential developers - overbuilding when demand is high, which forces rents down when it declines.

"Commercial real estate is all about supply and demand, and industrial supply has been very disciplined," said Ross Smotrich, an analyst at Barclays Capital Inc in New York.

Whether the warehouse Reits sustain that discipline is another matter.

"Industrial is anywhere from a 5,000 sq ft building in Manhattan to a million sq ft in suburban Indianapolis," Mr Guinee said. Outside the big urban centres, he said, "clearly some markets are in the process of being overbuilt, and those will suffer more when the inevitable recession comes". WP