Last week, Amazon successfully executed their fourth annual Prime Day, an exclusive sale to its Prime members that lasted 36 hours. Amazon said online shoppers purchased more than 100 million products worldwide, generating an estimated $3.4 billion in sales and making it the biggest shopping day in its history. While Amazon has humble beginnings as an online bookseller, it has quickly transformed into the largest e-commerce company in the world, selling just about anything you can imagine.
There is no doubt consumers are changing their shopping preferences, and the rise of e-commerce has been a disruptor to brick and mortar retailers. As technologies advance, consumers have changed the way they go about their daily lives, growing accustomed to receiving a range of products and services on-demand. As foot traffic in malls declines, there has been a growing call for industrial space to support e-commerce operators.
This week’s chart depicts the growth of e-commerce sales, along with a subsequent decline in industrial vacancy rates. According to the U.S. Census Bureau, as of the first quarter of 2018, e-commerce sales topped $122 billion on a seasonally-adjusted basis, which represented 9.4% of total retail sales. This represents a 16.4% change from the previous year and a 240.5% change from 10 years ago, when e-commerce represented just 3.6% of overall retail sales.
As the market deals with excess physical retail space, the industrial sector has benefited from rising demand as more goods are purchased online, since industrial properties serve as storage and distribution points for a wide variety of products. As e-commerce grows, demand for industrial space has begun to exceed supply, causing a strong demand driver for more industrial space. As a result, industrial properties have benefited from rising rents and vacancy levels near historic lows.
Industrial properties had previously been overlooked in commercial mortgage-backed securities (CMBS), as they did not represent a large allocation in transactions. Over the last several years, we have seen a shift in the commercial real estate property mix within CMBS, as retail has more recently fallen out of favor. In 2018, the average allocation to industrial and retail properties has been 8.1% and 22.1%, respectively. This compares to an average allocation of 3.8% for industrial and 44.6% for retail in 2011.
Key Takeaway
E-commerce has been on an upward trajectory, and I expect online sales to increase, which will propel demand for industrial space even higher. While negative news and store closures have dominated the retail space in commercial real estate, one bright spot has been the industrial sector, as occupancy remains near record highs. I expect strong market occupancy and solid rent growth to continue in the industrial space as the marketplace continues to evolve.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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