In last week’s note, we mentioned e-commerce gross sales knowledge intimately relative to headline numbers and concluded that e-commerce remains to be a long-term driver for total retail gross sales, significantly for clothes and normal merchandise.
This notice seems to be at e-commerce warehousing/logistics REITs that are the biggest portion of the Alerian Disruptive Know-how Actual Property Index (LANDX) (presently 56.7% of its index weight).(1)
E-Commerce has been a optimistic development for logistics REITs.
Whereas logistics REITs forecast a slight slowdown in e-commerce exercise, it ought to proceed to be a long-term driver as e-commerce retailers contribute to new leases and better occupancy charges even with rents larger with inflation.
On common, occupancy charges had been round 98% throughout constituents in LANDX in 2Q22 in comparison with 97% in 2Q21. Though Amazon (AMZN) has been pulling again on its logistics warehousing area, different retailers are nonetheless driving demand. Prologis (PLD, 6.6% index weight) stories that Amazon was solely 21% of its new e-commerce leasing by sq. footage, whereas different prime ten international retailers (Walmart (WMT), Alibaba (BABA), and many others.) had been 35%.
The remaining 44% had been different smaller retailers, illustrating how fragmented the e-commerce market has change into regardless of Amazon’s massive affect.(2) Surprisingly, Amazon solely contributes 2-5% to complete annualized lease regardless of being the biggest tenant for many REITs.
Why do e-commerce retailers drive demand for logistics REITs? To start with, each on-line and conventional retailers are looking for warehouse areas nearer to metropolis facilities in an effort to scale back time and price of transportation and supply.
Second, retailers want a larger quantity of area for e-commerce distribution. In line with Prologis, on-line retailers want thrice the distribution middle area than brick-and-mortar retailers resulting from larger stock ranges, larger product selection, bigger outbound delivery area necessities, and elevated returns.(3)
And at last, some retailers could also be seeking to improve area to newer buildings as know-how and automation turns into extra essential in warehouse operations together with RFID chips and robots for “picking” stock.
Many logistics REITs anticipate stock ranges to stabilize at larger ranges.
Provide chain points are nonetheless prevalent with delivery prices nonetheless at report highs. Railroad strikes had been narrowly prevented in mid-September however illustrated how simply additional provide chain disruptions may happen.
Due to the extreme provide chain constraints seen earlier in 2020, many retailers (each conventional and e-commerce) are nonetheless cautious of upper client demand coupled with longer delivery instances which may put them ready with little obtainable stock.
Due to this, many retailers shifted their fashions from “just-in-time” to “just-in-case” and held on to bigger ranges of stock. Present inventory-to-sales ranges are nonetheless under pre-pandemic ranges for clothes, which was one of many segments talked about in our previous e-commerce note.
Normal merchandise inventory-to-sales ranges are barely larger than pre-pandemic ranges, however a part of this can be attributed to “safety stock” of stock.
Some massive retailers like Wal-Mart have discovered themselves with an excessive amount of stock, whereas supply firms like FedEx (FDX) have additionally warned of a deceleration in demand.
These downturns are considerably anticipated when client demand preferences shift as quickly as they did over the previous two years – for instance, shoppers are actually shopping for much less residence enchancment items and furnishings as they did after they had been staying at residence.
Moreover, rising inflation stays an element which creates uncertainty for client discretionary spending. However long run, these points ought to subside, and inventory-to-sales ratios ought to stabilize at the least to pre-pandemic ranges – though estimates from PLD predict that ratios will truly settle 5-10% above pre-pandemic ranges resulting from retailers holding extra security inventory, significantly in instances the place transportation prices outweigh storage prices.(4)
E-commerce progress continues to drive larger demand, new leases, and better occupancy charges in logistics warehousing. Though REITs have seen a big sell-off in early 2022, LANDX has nonetheless been in a position to outperform each the S&P 500 (SPX) and the FTSE Nareit All Fairness REITs Index (FNER) on a complete return foundation, whereas providing larger yields than broader equities.
The Alerian Disruptive Know-how Actual Property Index (LANDX) is the underlying index for the First Belief Alerian Disruptive Know-how Actual Property ETF (DTRE).
(1) All index weights as of September 16, 2022
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Editor’s Notice: The abstract bullets for this text had been chosen by In search of Alpha editors.