While much of the market’s recent focus has been on how e‑commerce is challenging retail landlords, one should not overlook the fact that an even larger segment of the real estate investment trust (Reit) market could benefit.
Every time you make a purchase on your smartphone or computer, it sets a sequence in motion that travels through a network of communications, data and logistics facilities— many of which are owned by Reits. These companies play an integral role in getting your package from the warehouse to your doorstep, giving investors a way to participate in the potential growth of e-commerce.
A resilient opportunity
Technology-related Reits offer some of the more attractive opportunities we see today, often benefiting from the rise of e-commerce and the demand for faster mobile networks, faster delivery times, more bandwidth and more data storage. These powerful secular drivers tend to be less dependent on the broader economy, which may help to counter the ebbs and flows of market cycles.
However, there are unique challenges to investing in these property sectors, as they participate in a market that is still rapidly evolving. With consumers spending more online and organisations modernising their operations, the e-commerce marketplace should continue to grow in size and sophistication, progressing in ways that have not even surfaced yet.
The following three sectors—cell towers, data centres and industrial properties—lie at the heart of the digital ecosystem, providing critical infrastructure for the e‑commerce value chain.
Industrial Reits own warehouses that are generally used by retailers and logistics companies to house goods that are ultimately delivered to a store or directly to the end consumer. Historically, these properties have been located near transportation hubs such as airports, marine ports and highways. But the growth in e-commerce is structurally changing traditional logistics for parcel delivery.
Industrial landlords are now building facilities closer to population centres where consumers and workers live, allowing businesses to deliver goods to consumers faster and cheaper. Many warehouses are becoming increasingly automated with robots that work alongside human operators to store and retrieve items.
Whether serving up video from the cloud, routing an online transaction, or connecting employees through virtual networks, data centres provide critical support for the digital economy. A data centre might look like a normal office or industrial building from the outside. But once you pass through their heavily secured entrances, the insides are a hive of optical cables, equipment racks, cooling units and backup generators, where businesses can rent space to store networking, data storage and communications hardware. With thousands of companies housing equipment in the same space, businesses can often connect to different partners and service providers to deliver content to users.
Data centres consume massive amounts of power and rents are generally based on how much electricity a tenant needs rather than square footage. Leases for larger wholesale tenants often last 7 to 10 years, while smaller retail tenants usually have shorter leases of less than five years. Historically, high customer retention rates have generally resulted in stable cash flows, and contracts usually contain yearly rent increases tied to inflation.
Wireless carriers need to continuously improve their networks due to the explosive growth in mobile data use. These investments typically translate into new tenants for cell towers and/or amendments of existing leases. A single cell tower can typically accommodate multiple tenants, leasing the vertical space to wireless and broadband service providers.
Because towers are relatively simple structures, they can be built quickly to meet rising demand. As a group, companies have recently been constructing several thousands of towers a year. However, incumbent tower owners generally enjoy significant barriers to new competition due to strict zoning laws, limited suitable locations and the network effect and scale their towers provide to end users. Contracts typically last 5–10 years and have historically had a 98–99% renewal rate upon expiration, resulting in highly predictable cash flows. Leases often include annual escalators, with rents increasing automatically by 3% to 3.5% in the US, or linked to inflation elsewhere.
Rogier Quirijns is portfolio manager, Global and European Real Estate Securities funds at Cohen & Steers