There are many reasons retailers such as Target, Sears and Walmart have seen their shares drop this year. One biggie is that more and more people are spending their dollars online. According to eMarketer, an independent research firm, the world’s consumers will spend US$1.5 trillion online this year; that should climb to US$2.3 trillion by 2017.
The growth in e-commerce is shaking up another industry: real estate. E-commerce providers may not have much need for mall space, but to fulfil their customers’ orders quickly, they need warehouses. In recent years, Amazon, Walmart and others have spent billions buying, building and leasing industrial real estate. Growth in occupied warehouse space far outstrips the same for retail space.
That trend spells opportunity for real-estate investment trusts. Bob Swanson, a portfolio manager with CI Financial, says that out of the three main REIT sub-sectors—residential, commercial and industrial—it’s the last that stands out. Like most REITs, these companies pay solid dividends (Vancouver’s Pure Industrial pays a 6.5% yield), but they also have growth potential, he says.
That’s in part because warehouse supply surpasses demand. Older buildings are being updated and new facilities built, “but it’s not happening overnight,” Swanson says. That imbalance will push up rental income.
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Oppenheimer & Co.’s Stephen Manaker expects funds from operations in the industrial REIT sector to grow by 8.5% this year, compared with 7.4% in the commercial space. Warehousing REITs trade at 19 times 2015 earnings compared with 16 times across the sector, he says, so you’re paying a little more for that additional growth.
One drawback to these stocks is that there aren’t many to choose from. You’ll have to look globally—there are several options in Japan, says Swanson—and decide whether you want to own a pure play industrial operation or a diversified REIT with good exposure to this property type.
The cardinal rule of real estate—location, location, location—still applies. Look for REITs with space near big cities, highways and airports. If you can’t find a company you like, there are more on the way. Still, existing landholders have an advantage, says Swanson. “Good properties are being bid up.”