A more sanguine interest rate outlook is among the reasons real estate stocks and exchange traded funds are bouncing back this year, but rates aren't the only factor to consider.
Some real estate ETFs with a narrower focus on high-growth corners of the commercial real estate industry are crushing their more traditional rivals.
What Happened
The Pacer Benchmark Industrial Real Estate SCTR ETF INDS is up 17.74 percent year-to-date while the MSCI US Investable Market Real Estate 25/50 Index and the Dow Jones U.S. Real Estate Index are up an average of 12.6 percent.
INDS, the only ETF dedicated to industrial real estate investment trusts, follows the Benchmark Industrial Real Estate SCTR Index. That benchmark invests “in industrial REITs that are part of the e-commerce distribution and logistics networks along with self-storage facilities,” according to Pacer.
Why It's Important
The e-commerce boom and the related real estate demands by companies such as Amazon.com Inc. AMZN powering INDS and industrial REITs higher.
“Despite the growth of e-commerce, it’s still just a fraction of all retail sales,” said Nareit. “U.S. e-commerce sales rose to $131 billion in the third quarter of 2018, a 15 percent increase from the same period a year earlier, according to the U.S. Census Bureau. Yet that still only represented 9.8 percent of all retail sales.”
Investors looking to place this theme via ETFs need to turn to INDS and the reason is simple. The aforementioned MSCI US Investable Market Real Estate 25/50 Index and the Dow Jones U.S. Real Estate Index simply don't have large enough industrial REIT allocations to adequately take advantage of upside in those names. Industrial REITs are an average of 6.45 percent of those benchmarks.
What's Next
Developers are scrambling to meet demands for more industrial real estate space. Last year, 262 million square feet of such space was introduced, up 9 percent from 2017, according to Prologis Inc. PLD, the largest holding in INDS with a weight of almost 15 percent.
“Prologis Research projects 250 million square feet of net absorption and 260 million square feet of deliveries in 2019,” said the company. “As a result, the vacancy rate should stabilize at its historic low of 4.5%, maintaining upward pressure on rental rates and making expansion challenging for customers in many markets.”
Shares of Prologis and Duke Realty Corp. DRE, which combine for almost 30 percent of INDS's weight, are up an average of 18.1 percent this year.
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