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The U.S. Needs 1 Billion More Square Feet of Industrial Space: Time to Invest?

By Reuben Gregg Brewer – Dec 22, 2021 at 6:29PM

Key Points

  • Prologis has a successful track record of growing through ground-up construction, with ample vacant land to keep the trend going.
  • STAG counts Amazon as its largest tenant, demonstrating that it's benefiting from the growth of e-commerce.
  • W.P. Carey's diversified portfolio and high yield is a good mix for investors who want to benefit from e-commerce without betting the house on it.

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As shopping gets more digital, demand for industrial space is expected to explode. How can you play this trend?

Online retail is here to stay -- and it will continue to have massive implications for real estate. Most people focus on the negative here, worried that physical stores are going to disappear (likely an overstated risk). However, there's a positive side to this as well, as more online sales means more demand for industrial real estate owned by landlords like Prologis (PLD). Here's a look at what's going on and how you can benefit as an investor.

A long-term shift

Even before the pandemic, brick-and-mortar retailers were dealing with the so-called retail apocalypse. Consumers were increasingly buying online, not in stores. The deeper take here is that financially weak retailers weren't keeping up with customer trends, including, but not limited to, a desire to buy online. Failing to provide what customers want, from on-trend fashions to the buying experience, is a quick way to go out of business, and many laggard retailers did just that.

A delivery truck dropping off boxes.

Image source: Getty Images.

However, some retailers managed to limp along despite the retail apocalypse -- at least until the 2020 pandemic forced people to stay home and closed nonessential businesses. With online shopping the only option in many cases, customers bought over the internet, and more struggling retailers went under. This was a big problem for retail real estate investment trusts (REITs), as occupancy fell even further. 

To be fair, the trends here are fluid, with major retailers like Macy's explaining that online sales are higher in regions where it has physical stores. So the online versus brick-and-mortar story is far from over. However, the clear trend is that online sales are growing. And that has an important, and far more positive, implication for another area of the real estate market: Industrial assets.

How big a benefit?

In a recent report, real estate industry watcher JLL took a look at consumer buying trends and the interaction with industrial properties. Notably, the company estimates that about 35% of industrial leasing was tied to e-commerce historically. JLL projects this number is closer to 50% today.

JLL describes online retailing as a "game changer" in the logistics space. Before you call this hyperbole, the research outfit estimates that the industrial sector will need to come up with 1 billion square feet of space by 2025 to accommodate the needs of online retail tenants. That's huge.

So how do you play it?

One of the best ways to jump on this trend is with warehouse giant Prologis. The real estate investment trust (REIT) owns properties in key gateway markets around the world and is already an integral part of the global supply chain. However, the big story here is that Prologis has a long history of building from the ground up. Over the past 20 years, it has invested $36.5 billion in construction and achieved a roughly 21% internal rate of return. It has land to support around $21 billion in future development, so there's plenty of room to run here as this industry giant helps to satisfy the demand for industrial properties.

The only problem is that investors are well aware of Prologis' long-term track record, and the yield is a miserly 1.5%. So this is not a name that yield-focused investors, or those with a value bias, should be looking at. It's really a growth story.

Chart showing fall in the dividends of Prologis, Stag, W.P. Carey, and the SPDR S&P 500 ETF, and a rise in Vanguard's, in 2021.

PLD dividend yield data by YCharts

Another interesting option is Stag Industrial (STAG), which counts Amazon as its largest tenant. In fact, that online juggernaut is more than three times larger than Stag's second-largest tenant. The yield here, meanwhile, is 3.2%, more than twice what you'd get from Prologis. And the monthly pay dividend has been increased annually since the REIT's initial public offering (IPO) in 2011. It's probably a good mix of growth and income.

A third choice for investors is W.P. Carey (WPC), which has a much more diversified portfolio spread across the industrial, office, retail, and self-storage sectors. However, warehouses make up almost a quarter of its rents. Notably, early in the pandemic, management made it clear that it was looking to put money to work in the industrial space to take advantage of the very changes highlighted by JLL.

This is actually a hallmark of globally diversified W.P. Carey, which tends to invest opportunistically in the properties and regions where the best investments exist. That's likely to include more industrial investments in the years ahead. The dividend yield here is an attractive 5.2% (with an increase every year since its 1998 IPO), which should interest investors looking to maximize the income their portfolios generate. And given the portfolio holdings outside of the industrial space, there's some diversification here just in case JLL's estimates don't pan out as expected. So conservative types will probably like it, too.

E-commerce sped up -- now what?

The pandemic has upended many things in life, and it has clearly had a material effect on the adoption of e-commerce. That has been a huge boon to industrial REITs and should continue to benefit them in the future, with JLL's research suggesting massive demand ahead.

If that pans out, Prologis will have a chance to build on all of its vacant land, STAG will continue to buy more properties like the ones it leases to Amazon, and W.P. Carey will find exciting opportunities to make warehouses a bigger piece of its portfolio. At least one of these REITs should suit the needs of investors looking to play this big-picture trend.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer owns W. P. Carey. The Motley Fool owns and recommends Amazon, Prologis, and Stag Industrial. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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