In last week’s note, we extensively discussed e-commerce sales data relative to headlines and concluded that e-commerce is still a long-term driver of overall retail sales, particularly apparel and general merchandise . The notice focuses on the e-commerce warehousing/logistics REITs, which make up the largest portion of the Alerian Disruptive Technology Real Estate Index (LANDX) (currently 56.7% of its index weight). (1)
E-commerce is a positive trend for logistics REITs.
While logistics REITs anticipate a slight slowdown in e-commerce activity, this should remain a long-term driver as e-commerce retailers contribute to new leases and higher occupancy rates, even with higher rents coupled with inflation. On average, utilization of all LANX components was approximately 98% in 2Q22, compared to 97% in 2Q21. Although Amazon (AMZN) is retiring its logistics warehouse space, other retailers continue to drive demand. Prologis (PLD, 6.6% index weight) reports that Amazon accounted for just 21% of its new e-commerce leases by square foot, while the other top ten global retailers (Wal-Mart) [WMT]Alibaba [BABA]etc.) was 35%. The remaining 44% were other smaller retailers, showing how fragmented the e-commerce market has become despite Amazon’s huge influence. (2) Surprisingly, despite being the largest tenant for most REITs, Amazon only contributes 2-5% to total annual rent.
Why Are E-Commerce Merchants Driving Demand for Logistics REITs? First, both online and traditional retailers are looking for warehouse locations closer to city centers to reduce transportation and delivery times and costs. Second, retailers need more space for e-commerce sales. According to Prologis, online retailers require three times as much space in distribution centers as brick-and-mortar retailers due to larger inventories, greater product variety, larger outbound shipping space requirements, and higher returns. (3) Finally, some retailers may wish to increase space in new buildings as technology and automation become more important in warehouse operations, including RFID chips and robots for inventory “picking”.
Many logistics REITs expect inventories to stabilize at higher levels.
Supply chain issues are still rampant and shipping costs are still at record highs. Rail attacks in mid-September were barely averted, but it showed how easily supply chain disruptions could occur. Due to the severe supply chain constraints seen in early 2020, many retailers (both traditional and e-commerce) are still wary of higher consumer demand with longer lead times that they could position themselves with less available inventory. Because of this, many retailers have switched their models from just-in-time to just-in-case and continue to hold large inventories. The current inventory-to-sales level for clothing is still below pre-pandemic levels, which was one of the segments mentioned in our last e-commerce note. Normal inventory levels are slightly higher than pre-pandemic levels, but some of this can be attributed to “safety stock” inventory. Some big retailers like Wal-Mart are overstocked, while delivery companies like FedEx have also warned of a collapse in demand. This slowdown is somewhat to be expected given that consumer demand preferences have changed rapidly over the past two years – for example, consumers are now buying fewer home improvement items and furniture than they are staying at home. In addition, rising inflation is a factor creating uncertainty for consumer spending. But over the long term, those problems should ease and the inventory-to-sales ratio should at least stabilize at pre-pandemic levels — though PLD estimates estimate the ratio is actually 5 percent above pre-pandemic levels. -10% above that would offset more safety stock as retailers hold, especially in cases where transportation costs exceed storage costs. (4)
The growth of e-commerce leads to higher demand, new leases and higher occupancy rates in logistics warehouses. Despite REITs experiencing a major sell-off in early 2022, LANDX was able to outperform both the S&P 500 (SPX) and the FTSE NREIT All Equity REIT Index (FNER) on a total return basis, while also outperforming the broader REIT index. stocks with returns.
The Alerian Disruptive Technology Real Estate Index (LANDX) is the underlying index for the First Trust Alerian Disruptive Technology Real Estate ETF (DTRE).
LANDX provides a solid foundation for the future of disruptive technologies
Amazon’s four megatrends: e-commerce and beyond
Topic Times: Dig deeper into ecommerce data
(1) All index weights as of September 16, 2022
(2) PLD Investor Presentation July 2022
(3) Global Impact of E-Commerce on Logistics Real Estate | prologue
(4) Take Bullwhip by the horns: Check Inventory | prologue
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