Commercial Real Estate Debt: Retail’s Loss Is Industrial’s Gain

As the retail sector continues to struggle, investors compete for industrial opportunities driven by e-commerce.

June 17, 2019

This Commercial Real Estate Debt sector report is excerpted from the Second Quarter 2019 Fixed-Income Outlook.

All but two of the 50 companies identified by Finance 101 as being at risk of going out of business in 2019 fall within the “consumer cyclical” sector. Many are traditional retail store brands. Following estimates by Coresight Research that approximately 8,139 retail stores closed in 2017 and 5,528 in 2018, the predictions paint a negative picture for the retail real estate market. There are some bright spots, such as the grocery sector and the movement of online brands into brick-and-mortar locations, but the industrial sector has benefitted most from stress in retail.

For the decade ending in 2018, DigitalCommerce360 estimates that the Internet share of retail sales more than doubled, jumping to nearly 15 percent of total retail sales.

E-Commerce Sales Are an Increasing Share of the Retail Market

As e-commerce captures nearly 15 percent of the market, warehouse and distribution properties become a favored investment class as online sellers respond to consumer expectations of on-demand delivery.

E-Commerce Sales Are an Increasing Share of the Retail Market

Source: Guggenheim Investments, DigitalCommerce360, U.S. Commerce Department. Data as of 12.31.2018.

Developers are responding to the growing demand for warehouses, distribution, and “last mile” fulfillment centers. For many products, such as groceries, these facilities also need to provide cold storage and other customized space designed for efficient fulfillment and rapid consumer delivery. According to CBRE, rents for last mile properties, which tend to be smaller, Class B infill facilities located close to population centers, have grown rapidly due to increasing demand and lack of new development. Ironically, to take advantage of key locations near population centers, developers are looking to repurpose empty retail big box power center anchors.

Trends in real estate prices and cap rates reflect the strain on traditional retail assets and the increasing demand for new industrial sites. Prices for industrial properties rose nearly 8 percent during 2018 and 26.5 percent during the three-year period ending Dec. 31, 2018, over which time retail prices rose only 2 percent and 6.9 percent, respectively. In 2017, average cap rates for the industrial sector fell below retail cap rates, with CBRE identifying the widest divergence in major coastal population centers with the greatest access to consumers.

Industrial Cap Rates Dipped Below Retail in Q4

Prices for industrial properties rose nearly 8 percent during 2018 and 26.5 percent during the three-year period ending Dec. 31, 2018.

Industrial Cap Rates Dipped Below Retail in Q4

Source: Guggenheim Investments, Real Capital Analytics. Data as of 12.31.2018.

Vacancy rates at industrial properties remain quite low, averaging 5 percent, according to JLL, indicating that the industrial market still has room to grow. We expect these trends to continue as e-commerce continues to grow and provide efficient delivery of goods to consumers living in an on-demand world.

—Jennifer A. Marler, Senior Managing Director; William Bennett, Managing Director; Ted Jung, Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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