Supply chain plots a strong trajectory
Supply chain issues have made headlines over the last few years: from the toilet paper shortage of 2020, to the Ever Given cargo ship stuck in the Suez Canal in 2021, followed by the Canadian trucker protests of early 2022. Despite these unfortunate events, the supply chain represents attractive opportunities for real estate investors.
Spending on the rise
Adjusted for inflation, American spending on durable goods increased 26% from 2019 to 2021, setting an annual record for sales by mid-September. Accordingly, the number of containers unloaded at the nation’s ports increased by nearly 20%.
Supply chain real estate involves multiple stops
Distribution centers, truck terminals and warehouses are all considered industrial real estate. Industrial tenants leased an additional 509 million square feet in 2021, the eleventh consecutive year of positive growth. Vacancies plummeted to record lows, and rents reached record highs, nearly 9% year-over-year.
Let's go shopping
With record consumption, store openings outpaced store closures for the first time since 2016 and net demand growth was the strongest since 2017. Overall, nearly twice as many stores opened in 2021 and half as many stores closed compared to the prior year.
2021 industrial real estate one-year return1: 43%
Is this a turning point?
Industrial real estate saw a staggering 43% year-over-year return in 2021 (measured by the NCREIF Property Index). Among retail subsectors, neighborhood and community retail led the pack with unlevered returns of 8.5% and 6.6%, respectively, the strongest performance since 2017.
Industrial landlords have pricing power. Rent accounts for just 5% to 7% of supply chain costs, and tenants have historically few options for space. Of the 50 largest industrial markets, 47 have vacancies below their long-term averages. We anticipate continued strength in the sector.
2021 neighborhood retail real estate one-year return1: 8.5%
In the retail sector we have seen a strong pivot: 46 of the 50 largest strip center markets and 36 of 50 neighborhood center markets have tighter vacancies than their long-term averages. With strong performance and increased investor interest, we think these retail subsectors are likely to see additional capital appreciation.
In this issue
1 Invitation Homes filings; Public company home counts from public filings; Private company home counts estimated using HouseCanary data.
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A word on risk
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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