Follow the Money Part Two

Industrial / Logistics

On the path for stable growth are warehouses and shipping centers responding to the demand for expanded e-commerce and touchless trade.

According to Moody’s REIS, “in the months of March and April alone, the proportion of e-commerce relative to total retail sales spiked by 500 basis points, from 11.4% at the end of 2019 to 16.4% as of the latest figures. The share figure had been rising steadily since the dawn of e-commerce in the late 1990s, but the magnitude of the spike over two months prompted by COVID-19 is historic.”³⁷ After a breakaway second-quarter increase of 44.4% annualized, e-commerce growth dipped to 37.1% in Q3, and Cyber Monday sales were just 15.1% higher than in 2019.³⁸ 

Though slowing after the initial boom, the trajectory for online retail remains positive, bringing with it an increased demand for industrial and logistics facilities.

Delinquency rates were lowest for industrial property loans, inspiring investor confidence in the near term. Further down the road, ongoing distress in brick-and-mortar retail is projected to grow demand for industrial even more. Since an online retailer needs three  times the square footage that a brick-and-mortar business of comparable volume would require, retailers moving their operations online will effectively have to triple their footprints in the industrial space.³⁹

However, a major component of industrial demand is the volume of international trade, as shipyards and port properties facilitate the importing and exporting of goods. During the worst months of the pandemic, U.S. imports dropped to 25% below the 20-year average, while exports fell even further to 35% below the average.⁴⁰ However, the down spike in April and May was followed by a modest rebound — by Q3, U.S. imports were only down 7% year-to-date, while exports were down 15%.⁴¹

While the slump in international trade appears temporary, the growth in online retail appears mostly permanent. Therefore, we see a moderate positive outlook for industrial properties, whose investment potential is tipping toward growth as e-commerce supplants retail and fills the temporary void left by struggling international trade.

MISSION CRITICAL/ DATA CENTERS

An unequivocal positive outlook is sure for Mission Critical properties, the category that houses storage and distributed computing power for the booming tech sector.

A picture of resilience, Data Center REITs were among only 10% of REITs to yield a positive return amid plummeting ETF values in March⁴² and finished 2020 with a 14.3% annual return.⁴³ 

Managed by tech-forward companies who embrace automation,⁴⁴ data centers are resistant to labor fluctuations and bear little contagion risk to their few inhabitants. Most importantly, their services are increasing in demand — not only with the expansion of the sectors that need them, but also with the explosion of data and its many uses. While existing data stored online is estimated to total 40 zettabytes⁴⁵ (40 trillion gigabytes), the International Data Center estimates by 2025 it will exceed 175 zettabytes,⁴⁶ more than quadrupling the demand for data storage and transfer — a trend that led the Economist to call data “a new economy.”⁴⁷

In addition, the growth of edge computing — whereby cloud-based applications perform high-speed computations on the periphery of the network — will contribute even further to the demand wave for distributed server systems. Without a doubt, buildings will play a pivotal role in facilitating the growth of the data economy, and today’s Mission Critical landscape will soon be dwarfed by the emergence of tomorrow’s.

PROJECTED GROWTH OF THE GLOBAL DATASPHERE

CELL TOWERS

Typically seen as a subcategory of Infrastructure, the Cell Tower sector earns an honorable mention here due to its unique growth and hybridization potential in the coming years.

Many technological paradigms are shifting simultaneously, from the proliferation of cell phones and cell-enabled Internet of Things (IoT) devices to the much-anticipated rollout of 5G. Each of these changes is expected to increase the demand for cell tower infrastructure, particularly in urban and suburban locales, but also increasingly in rural ones.

Real estate investments in cell tower property have fared well this year, with REITs in the category rising some 13% to 15% while other categories floundered.^{48 49} SeekingAlpha reports, “Amid the widespread disruptions to the real estate sector caused by the coronavirus pandemic, the high-flying cell tower sector continues to thrive and is one of just three REIT sectors in positive territory this year.”⁵⁰

CELL TOWERS REITs vs. S&P 500 PERFORMANCE

One trend anticipated to sweeten the outlook for cell towers is the hybridization of the category with other sectors. Because 5G’s shorter waves require a higher density of tower infrastructure, especially in concrete-dense urban centers that disrupt signals, owners of all property types may have the opportunity to lease land, roof, and outer wall space to cell tower developers. To seize such an opportunity, they’ll need designers with a deep knowledge of cellular tech.

Dallas-based commercial real estate firm Henry S. Miller notes, “Today, cell tower lease rates average around $45,000 annually. Although 5G’s smaller towers will not be able to command nearly that figure, property owners who lease space will still be able to reap significant passive income.” They add, “telecom companies will also need space in commercial real estate to set up micro data centers. Ranging from the size of a briefcase to a large filing cabinet, these micro centers will be closer to consumers as they use data.”⁵¹ 

Notably, Barron’s points out that 5G rollout (and its return on investment) will be slower than the hype surrounding it,⁵² meaning early buyers could become hasty sellers. Our advice to those seeking cell-tower-related opportunities: avoid overhyped acquisition schemes and instead cultivate connections with mutual stakeholders on longer-term (and multiple-bottom-line) ventures.

Life ScienceS

Specialized for the research and manufacture of technologies, especially biomedical ones, Life Sciences buildings are here to stay, even in spite of — or perhaps in part because of — the pandemic.

While most other markets were struggling through Q1 financial panics, “the first quarter of 2020 set an all-time record quarterly high for the amount invested in venture-backed life science companies, while medical research philanthropy also reached an all-time high,” according to Nareit.⁵³

CBRE, reporting on Life Sciences real estate in Boston, said that “The suburban lab market has seen overall positive absorption the past two quarters... Availability remained flat at 13.2% while vacancy decreased 70 basis points to 8.9%,” and in Cambridge, MA: “Demand for lab space in Cambridge has not softened during the COVID-19 pandemic. The life science market saw the least number of requirements paused as a result of COVID-19, compared to any other sector.”⁵⁴ Demand for lab space in Cambridge jumped 36% during the six worst months of the crisis, indicating unshakable foundations for the sector.

Real estate journal The Commercial Observer, calling the category “pandemic-proof,” adds that demand for Science & Tech buildings will remain strong throughout the decade as the baby-boom population ages: “An estimated 10,000 people were turning 65 every day by 2019, according to census data, and 21% of the U.S. population is expected to be at least that age by 2030. That is a lot of potential customers for life-sustaining and life-enhancing medications and machines.”⁵⁵ They also emphasize that unlike other office categories, lab workers can’t telecommute, instead requiring dedicated lab space with long lease terms and specialized design and management parameters.

Industry professionals should note that Science & Tech is a small niche, present in just a few major cities so far: “more than two-thirds of life sciences jobs were in just 11 metros by the end of 2019, with Greater Boston, the San Francisco Bay Area, and the San Diego area hosting the most by far. Philadelphia, northern New Jersey, the Washington area, Seattle, North Carolina’s Raleigh-Durham, Chicago, New York City, and Baltimore round out the list.”⁵⁶