Duke Realty CEO Jim Connor was quoted in a recent Wall Street Journal article on investors’ recent enthusiasm for shares of REITs with significant industrial portfolios. Duke Realty’s strong first-quarter earnings are referenced in the article as well.
According to the article, shares of REITs that own industrial space are up 17% this year, against 6% for all equity REITs and 1.7% for the S&P 500. Much of that strength is due to growth in online retail.
Whereas the market had previously assumed that much of the new online retail inventory would share space in warehouses serving brick-and-mortar stores, the two distribution models have proven to be distinctly different.
“If you look at major retailers like Wal-Mart,” said Connor, “warehouses are set up to send truckloads of goods to individual stores.” Online distribution centers, he continued, “are set up exactly the opposite. Everything goes out in ones and twos.”
Online retail accounted for 7% of U.S. retail sales last year, nearly double the 3.9% they represented in 2009. And U.S. inventory levels have been rising faster than sales since 2011, driven largely by the need to keep more inventory on hand when promising customers faster delivery times.
While investors may have shied away from industrial REITs due to large-scale vacancies following the 2008 crash, a restraint in new development on the part of today’s industrial REITs is also driving confidence in the sector.