At more than $2,100 per share, e-commerce behemoth Amazon.com, Inc. (NASDAQ:AMZN) is out of reach for most investors. But those who are looking to tap into the long-term potential of e-commerce companies like Amazon should look at industrial real estate investment trust (REIT) stocks.
Investing in giant warehouses, factory buildings, and storage facilities might sound boring, but thanks to the rise of e-commerce, industrial REIT stocks have emerged as an excellent opportunity for investors looking for huge profits and dividend growth.
When it comes to returns, industrial REIT stocks have been on a tear, making it one of the hottest sectors in North America. And thanks to the explosive growth in e-commerce, the demand for warehouse space will likely keep rising. That should continue to be a boon for industrial REITs.
But there’s more driving the growth of industrial REIT stocks than just online retailers. Companies that serve those online retailers, such as couriers, need more warehouse space too.
Online Sales Are Up; So Is Demand for Warehouse Space
After years of underperforming in the stock market, industrial REITs are back. Case in point: the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (NYSEARCA:SRVR) advanced about 40%% in 2019 and is up approximately 10% in 2020 (as of this writing).
In comparison, shares of the iShares Core U.S. REIT ETF (NYSE:USRT) climbed about 22% in 2019 and are up about five percent in 2020. The S&P 500, meanwhile, grew about 30% in 2019 and has climbed about five percent in 2020. Solid numbers, but not industrial REIT good.
What’s behind the exuberance? Online shopping is up and it takes a lot of space to run an e-commerce operation.
According to one study, in 2019, the e-commerce sector was expected to grow by double digits for the 10th consecutive year and surpass 10% of total U.S. retail sales for the first time ever. (Source: “US Ecommerce 2019,” eMarketer, June 27, 2019.)
According to another study, in 2017, U.S. consumers spent $274.8 billion on e-commerce. That number climbed to $365.2 billion in 2019 and is projected to hit approximately $600.0 billion in 2024. (Source: “Retail e-commerce sales in the United States from 2017 to 2024,” Statista Ltd., February 6, 2020.)
Operating an online store is logistically a lot more difficult than running a traditional brick-and-mortar one. There’s more involved in running an e-commerce operation than simply warehousing and shipping products.
It’s estimated that online retailers need three times more warehouse space than traditional brick-and-mortar stores, for inventory and dealing with returns. (Source: “Rise of e-commerce retailers drives growth for industrial REITs,” The Globe and Mail, September 5, 2019.)
Brick-and-mortar stores warehouse their inventory vertically. Goods are stacked on a pallet, put in a truck, and delivered to the physical location. It’s up to employees at the store to unpack the pallets, and up to shoppers to put the products in their carts.
It’s different for e-commerce operations. There, employees need to be able to easily navigate their work space, have easy access to inventory, and have enough room to package hundreds of individual orders.
That means companies like Walmart Inc (NYSE:WMT), with both brick-and-mortar and online retail channels, need to run their warehousing and distribution systems differently.
And thanks to the promise of exceptionally short delivery times, e-commerce companies need to keep a lot of inventory on hand. This might explain why U.S. inventory levels have been rising faster than sales.
Moreover, because the U.S. is a big country, the e-commerce giants need to open multiple warehouse spaces that are close to their customers.
Online sales have been flourishing and are projected to remain strong. But even if overall retail sales don’t grow, the shift from brick-and-mortar stores to e-commerce will drive demand for more warehouse space.
That’s because businesses can’t warehouse their online and brick-and-mortar inventory in the same place.
The profit potential for industrial REITs is massive. E-commerce continues to experience massive growth, so the demand for warehouse space should keep going up.
The proof is in the numbers: industrial REIT stocks have been trouncing the broader market, even beating core REIT stocks.
This doesn’t mean the U.S. industrial REIT sector won’t face hurdles. Every industry goes through cycles. That said, the rising demand for warehouse space suggests that industrial REITs will continue to be one of the most profitable areas for investors.