Global Industrial Real Estate: Current Trends and Potential Disruptors - Brookfield Asset Management
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
PUBLIC SECURITIES GROUP i | 2018 | RE AL ES TATE
Global Industrial Real Estate: Current
Trends and Potential Disruptors
There are currently several opposing forces at work
within the industrial real estate sector. Demand drivers
like e-commerce and supply chain modernization remain
very strong. At the same time, however, new completions
and elevated company valuations require consideration.
There are also a number of potential disruptors that
could change how industrial developers and landlords
operate.
1Global Industrial Real Estate: Current
Trends and Potential Disruptors
Strong Backdrop
Industrial real estate has been among the strongest performing property types in recent years. Positive demand from
e-commerce growth has resulted in low vacancy rates and low cap rates, translating into strong returns for investors. In
both public and private markets, U.S. industrial real estate posted the highest sector-level returns over the past one-,
three- and five-year periods through December 31, 2017.
A NNUA LIZED R E TUR NS OF PRIVATE A ND PUBLIC INDUS TRIA L R E A L ES TATE
PERIOD ENDED DECEMBER 31, 2017 NCREIF PROPERTY INDEX (NPI) FTSE EPRA/NAREIT NORTH AMERICAN
INDUSTRIAL INDUSTRIAL INDEX
One-year 13.1% 23.3%
Three-year 18.1%
13.4%
Five-year 13.2% 16.4%
Source: Bloomberg, National Council of Real Estate Investment Fiduciaries. See index definitions in the disclosures section at the end of this document.
Positive performance has resulted in what we believe are elevated valuations for the public sector relative to the
broader real estate universe. The spread between the average funds-from-operations (FFO) multiple for industrial
stocks compared to that of the broader universe is wider than it has been in the past seven years.
Healthy growth in e-commerce sales has been a key driver for demand growth for industrial real estate. Total U.S.
e-commerce sales increased 16% in 2017, to $453.5 billion. We believe that double-digit growth rates will continue
globally for e-commerce. This strong demand backdrop over the last few years has been met with limited new
development deliveries, resulting in record low vacancies and strong rent growth for industrial landlords in North
America.
INDUS TRIA L PROPERT Y VA LUES A ND C A P R ATES HIS TORIC A L VA LUATION: BROA D R E A L ES TATE
VS. INDUSTRIAL SECTOR
160 10% 25x
150 9.4% 9.4%
140 9% 20x
130
131
120
8% 15x
110
100
100
7% 10x Current Spread: 5.6x
90
6.1% Average Spread: 1.9x
80
5x
70 62 5.3% 6%
60
50 5% 0x
Q1 2005
Q3 2005
Q1 2006
Q3 2006
Q1 2007
Q3 2007
Q1 2008
Q3 2008
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Q1 2011
Q3 2011
Q1 2012
Q3 2012
Q1 2013
Q3 2013
Q1 2014
Q3 2014
Q1 2015
Q3 2015
Q1 2016
Q3 2016
Q1 2017
Q3 2017
Q1 2018
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Commercial Property Price Index (Indexed to 100 in July '07) North American REIT Weighted Average FFO Multiple
Industrial Nominal Cap Rates (%) Industrial Sector Weighted Average FFO Multiple
Source: Green Street Advisors, November 2017. See index definitions in the Source: SNL, January 2018. See index definitions in the disclosures section
disclosures section at the end of this document. at the end of this document.
GLOBAL INDUSTRIAL REAL ESTATE: CURRENT TRENDS AND POTENTIAL DISRUPTORS 2Potential Challenges Ahead
Going forward, however, we think demand is likely to normalize and vacancy rates will move higher as completions
increase. Additionally, certain U.S. coastal infill markets have seen rent pressure as existing supply is repurposed for
other uses. This has led to strong industrial rental rate increases in recent years, but going forward, we expect that
growth to slow. Over time, we think the industry will see decreases on mark-to-market rent renewals on U.S. portfolios
and investment returns are likely to moderate.
INDUS TRIA L R E A L ES TATE M A R K E T
150 15.0%
Forecasted 14.0%
100 13.0%
12.0%
Million SF (MSF)
50 11.0%
10.0%
0 9.0%
Q1 1990
Q4 1990
Q3 1991
Q2 1992
Q1 1993
Q4 1993
Q3 1994
Q2 1995
Q1 1996
Q4 1996
Q3 1997
Q2 1998
Q1 1999
Q4 1999
Q3 2000
Q2 2001
Q1 2002
Q4 2002
Q3 2003
Q2 2004
Q1 2005
Q4 2005
Q3 2006
Q2 2007
Q1 2008
Q4 2008
Q3 2009
Q2 2010
Q1 2011
Q4 2011
Q3 2012
Q2 2013
Q1 2014
Q4 2014
Q3 2015
Q2 2016
Q1 2017
Q4 2017
Q3 2018
Q2 2019
Q1 2020
Q4 2020
Q3 2021
8.0%
-50 7.0%
6.0%
-100 5.0%
Quarterly Absorption (MSF) Quarterly Completions (MSF) Vacancy Rate (%)
Source: CBRE Econometric Advisors
Despite the overall trends in e-commerce growth, the acquisition of Whole Foods by Amazon. Other
changes in strategies among industrial tenants could examples include:
moderate demand. As retailer e-commerce platforms
• Target’s acquisition of Shipt, making same-day
mature, capital expenditures related to technology,
delivery an option at about half of its stores in early
fulfillment and distribution have been declining. This
2018
ultimately translates into slowing demand growth.
• Wal-Mart’s plans to double the number of in-store
Additionally, retailers are facing pressures related to
pickup locations
shipping costs (both deliveries and returns), which have
been driven higher primarily by a shortage of labor. • Zara’s use of robots to fulfill in-store pickups, which
These costs make up more than 50% of retailers’ cost account for one-third of the company’s global online
structures and are growing. sales
We see a move toward a “buy online/pick up in store” Although retailers are experiencing double-digit sales
model. More online shoppers are embracing this option, growth in e-commerce channels, rising cost pressures
citing speed as the top reason. Retailers prefer the option associated with these growing digital platforms are
as it reduces expenses related to fulfillment centers and forcing these companies to optimize distribution
shipping costs. channels. Ultimately this could result in slowing demand
and deceleration of rent growth in the industrial real
This is particularly important in the grocery space where
estate market.
competition is heating up in the online channel following
GLOBAL INDUSTRIAL REAL ESTATE: CURRENT TRENDS AND POTENTIAL DISRUPTORS 3INDUSTRIAL PROPERT Y VALUES AND YIELDS
International Spotlight – U.K. and Japan
Outside the U.S. market, we think a number of current
trends are worth watching. Despite uncertainty
related to Brexit trade negotiations in the U.K., the
region’s industrial real estate sector has been resilient.
Property values have meaningfully risen over the last
few years as net initial yields (cap rates) have declined.
The underlying fundamentals in the U.K. continue
to be strong. Online penetration is higher in the U.K.
compared to the U.S., but valuations in public markets
appear to reflect this currently.
U.K. Industrial Property Prices (Indexed to 100 July ’06)
U.K. Net Initial Yield (%)
Source: Green Street Advisors, November 2017
The Japanese industrial market has undergone a significant transition. The supply chain was typically fragmented with
multiple layers, but modernization has resulted in consolidation. The amount of advanced logistics facilities as a percentage
of total industrial supply has more than doubled over the past five years (from 1.9% to 3.9%), according to CBRE. These
modern logistics facilities are taller buildings with multiple stories, increasing the usable square footage without increasing
the footprint.
We believe that new deliveries of advanced logistics facilities will outpace demand in 2018 as deliveries are forecasted to be
7.5% of the current existing supply. In general, we believe the first movers in this wave of new supply have received attractive
return on capital, but we are cautious going forward as new supply begins to outpace demand.
Source: CBRE Research
GLOBAL INDUSTRIAL REAL ESTATE: CURRENT TRENDS AND POTENTIAL DISRUPTORS 4Potential Disruptors
We see several potential disruptors on the horizon that are worth considering as we forecast growth rates for industrial real
estate.
The first is the adoption of autonomous vehicles. The value of industrial real estate could be significantly impacted as
autonomous vehicles and commercial vehicle fleets reduce congestion and travel times. We would expect to see a shift in
relative values of industrial real estate, likely slowing rent growth in infill markets and driving growth higher in nearby low-rent
markets.
Source: Brookfield Investment Management Inc.
Additionally, driverless fleets will help alleviate pressures in the trucking industry, which has struggled to keep pace with
demand amid a shortage of drivers. We believe this may result in additional shadow supply of industrial product in the form
of more trucks on the road transporting goods.
On the positive side for industrial real estate, autonomous vehicles will dramatically reduce the cost structure for shippers,
as half of these expenses are related to wages and benefits. This could make online shopping and delivery a more cost
competitive option to in-store retailing.
The second disruptor is Amazon’s rethinking of the supply chain. The company recently launched a trial program in an
effort to shrink inventories and shorten delivery times (and therefore reduce costs). In the company’s current Fulfillment by
Amazon process, goods are shipped from merchants to Amazon warehouses. Amazon is then compensated for storing,
packing and delivering items once they are ordered by customers.
Under its trial program, Amazon is making its shipping and logistics software available to third-party vendors; and will
manage the pick up and delivery of merchants’ goods from third-party warehouses. This essentially allows Amazon to ship to
consumers directly from third-party facilities, eliminating the need for an Amazon sorting facility and therefore reducing its
logistical footprint.
Investment Implications
While the fundamental, long-term demand drivers for the sector remain positive, we currently have a cautious view on the
industrial sector in the public markets. We see some challenges that are more near term and concrete, while others are
longer term and more abstract. We are considering all these risk factors as we seek to identify companies in the sector with
the best growth prospects at the best valuations.
GLOBAL INDUSTRIAL REAL ESTATE: CURRENT TRENDS AND POTENTIAL DISRUPTORS 5DISCLOSURES
As of March 29, 2018. © Brookfield Investment Management Inc. Brookfield Investment Management Inc. (“Brookfield”) is an SEC-registered investment adviser and
represents the Public Securities platform of Brookfield Asset Management Inc. (“BAM”), providing global listed real assets strategies including real estate equities,
infrastructure equities, multi-strategy real asset solutions and real asset debt. BIM is a wholly owned subsidiary of BAM.
The information in this report is not and is not intended as investment advice or prediction of investment performance. This information is deemed to be from reliable
sources; however, Brookfield does not warrant its completeness or accuracy. Brookfield disclaims any duty or obligation to update any information provided in this
report. This report is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product or service (nor shall
any security, product or service be offered or sold) in any jurisdiction in which Brookfield is not licensed to conduct business, and/or an offer, solicitation, purchase or
sale would be unavailable or unlawful. Past performance is not indicative of future results.
Performance shown in USD unless otherwise noted. Opinions, if any, expressed herein are current opinions of Brookfield Investment Management Inc. and are
subject to change without notice. The mention of specific securities, if any, is not a recommendation or solicitation for any person to buy, sell or hold any particular
security. Any outlooks or forecasts presented herein are as of the date appearing on this report only and are also subject to change without notice.
Information herein contains, includes or is based upon forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements, other than statements of historical fact, that address future
activities, events, or developments, including without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals,
expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other similar words are intended to identify
these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many
such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual
results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
The quoted indexes within this report do not reflect deductions for fees, expenses or taxes. These indexes are unmanaged and cannot be purchased directly by
investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors
relevant to any such comparison such as differences in the volatility, and regulatory and legal restrictions between the indexes shown and the strategy.
For Institutional Use Only and may not be reproduced, shown, quoted to, or used with members of the public.
DEFINITIONS
The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return index for private commercial real estate properties held for investment purposes
only. The capital value component of return is predominately the product of property appraisals.
The FTSE EPRA/NAREIT North America Index is designed to track the performance of listed real estate companies and REITs in North American markets.
Green Street’s Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real
estate transactions are currently being negotiated and contracted.
Nominal cap rates calculated as the difference between revenues and operating expenses, as a percentage of property value.
An FFO multiple is the multiple of funds from operations (FFO) per share of a company. FFO measures net income, excluding gains or losses from sales of property and
adding back real estate depreciation.
Infill industrial developments are typically situated in established markets, where new supply cannot be easily added due to geographical or other constraints.
ENDNOTES
i. The Public Securities Group (Brookfield Investment Management Inc.)
is a wholly owned subsidiary of Brookfield Asset Management Inc.
CONTAC T US
Telephone: 1-855-777-8001
Email: publicsecurities.enquiries@brookfield.com
Or visit our website at www.brookfield.com
© 2018 Brookfield Investment Management Inc.
RE_03-18
GLOBAL INDUSTRIAL REAL ESTATE: CURRENT TRENDS AND POTENTIAL DISRUPTORS 6You can also read
