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It’s Boom Time For Logistics Landlords

A group of job applicants, right, starts a tour as Amazon holds a job fair at its fulfillment center in Fall River, MA on Aug. 2, 2017. The warehouse is one of more than 70 fulfillment centers around the country. (Photo by Pat Greenhouse/The Boston Globe via Getty Images)

On the last day of 2017, I wrote a Forbes article titled, REIT Forecast For 2018: Building Boom. I pointed out that “under the new [tax] bill, real estate will not be subject to immediate expensing, like machinery and equipment.”

This is perhaps one of the most important elements in the new tax code, as it relates to commercial real estate, because, “had real estate been recognized under the immediate expensing provisions, it would have provided no depreciation shield that would have resulted in a drastic paradigm shift that would have destroyed the long-term benefits of compounding wealth.”

Remember – the new tax bill allows for machinery and equipment to depreciate in one calendar year. As Stephen Moore of the Heritage Foundation points out, “immediate expensing will cause a boom in corporate spending.” He correctly said, last December, “the first six months of 2018 could see over 4% GDP growth.”


Last week, the Bureau of Economic Analysis reported a growth rate of 4.1% in the second quarter of 2018, almost double the 2.2% rate in the first quarter – and the strongest figures since the third quarter of 2014. The statistics agency said there were positive contributions from household spending, exports and business investment.

One of the primary catalysts driving commercial real estate is e-commerce, as shares in Amazon are “considered to be one of the greatest growth stocks of our generation.” That’s according to Julian Lin, writer on Seeking Alpha, who also says Amazon’s “earnings power increases with every dollar growth in net sales on their e-commerce platform. As more and more retail sales take place on, so do their future earnings power. This is why I am never selling Amazon.”

Last week, Morningstar Credit Ratings a subsidiary of Morningstar, Inc., assessed the industrial sector in “an expansionary mode,” well-positioned, reporting, “Trends driving strong demand for warehouse space—primarily the growth of e-commerce and an expanding manufacturing sector—continue to drive low availability of space and encourage developers to build more.”

Their Chartbook report suggested with strong demand and low vacancies, industrial REITs in the first-quarter easily increased rental rates. And while primary threats to these positive trends are a drop off in manufacturing activity (if escalating tariffs led to an outright trade war), or deceleration in e-commerce trends (very unlikely), the silver lining is: during the downside of previous cycles, the industrial sector “can turn off the new supply spigot relatively quickly, allowing supply and demand to more rapidly return to equilibrium.”

In a article, Charles Keenan explains, “there is no doubt that one of the trends that has had the biggest impact on the real estate industry over the past decade has been the growth in e-commerce. While the rise in online shopping has clearly posed challenges for many retail real estate owners and tenants, it has been an absolute boon for other sectors—including industrial REITs.”

Keenan adds, “Duke Realty Corp. (DRE) released a report that showed for every billion increase in e-commerce sales, another 1 million square feet of fulfillment space is needed… Through 2021, Duke estimates another 339 million square feet of industrial space will be needed. In other words, the market would absorb an average of 1.62 million square feet of additional warehouse space every week—the equivalent of more than 28 football fields—and that’s just to meet the demand for warehouses geared to e-commerce.”

With such strong GDP growth, fueled by powerful e-commerce catalysts, as well as the spigot of capital flowing into corporate machinery and equipment, the REIT sector – specifically Industrial REITs – should continue to enjoy strong demand. Indeed, I say: it’s boom time for logistics landlords.

How To Play It

Within the Industrial REIT sector, I like Prologis Realty (PLD), Duke Realty, Monmouth Real Estate (MNR), and STAG Industrial (STAG).  These four REITs have enhanced exposure to logistics firms and they generate impressive growth. Also, within the Net Lease REIT sector, I like Realty Income (O) and W.P. Carey (WPC). These two REITs are not exclusively industrial, but they are gaining exposure within the logistics universe. Also, I like PS Business (PSB), considered a “flex” (office/warehouse) landlord with an impressive cost of capital (rated A- by S&P).

I own shares in WPC, STAG, MNR, and O.

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