Source: Seeking Alpha | Repost Serenity Alts 9/26/19

Once thought to be a “boring” real estate sector destined for chronic underperformance, industrial real estate has been on fire for the last half-decade. Demand for industrial space has been relentless, primarily driven by the rapid growth of e-commerce and the “need for speed” in goods distribution. Amazon’s push to two-day and same-day delivery has sparked a supply chain “arms race” among retailers and logistics providers of all sizes where it’s all about supply chain densification. Consumers and businesses alike are demanding ever-shortening delivery windows, necessitating the densification of supply chain networks and the establishment of distribution hubs closer to end-consumers.

Industrial real estate assets have become far more consumer-oriented over the past decade. Once reliant on growth in the manufacturing and industrial sectors of the economy, the logistics-oriented nature of the highest-value industrial assets has made the sector less exposed to international trade and the risks associated with the ongoing trade war between the US and China. While there are risks related to companies holding back logistics investment due to tariff-related supply chain uncertainty, the sector has only minimal direct exposure to negative impacts from the slowdown in manufacturing and industrial production.

E-commerce sales still represent just a small fraction of total retail sales, but roughly half of the incremental growth in retail sales over the past three years has come from e-commerce. Importantly, e-commerce is far less efficient than brick and mortar from an industrial space usage perspective. Each dollar spent on e-commerce requires roughly three times more logistics space than the equivalent brick and mortar dollar, according to estimates from Prologis. According to our estimates, e-commerce still accounts for less than 20% of total “at-risk” retail categories but is taking market share from these sectors at a rate of roughly 1% per year.

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