Warehouses Offer Crowded Shelter in Retail Storm - The Wall Street Journal

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June 29, 2020 8:28 am ET

E-commerce is surging as wary consumers avoid crowded public places. While the likes of Amazon and Europe’s top fashion website Zalando are the obvious winners, investors seem just as excited about their warehouse suppliers.

Spending has moved rapidly online during the pandemic. In the U.K., e-commerce accounted for 31% of retail sales in April, up from 19% for the same month last year. Only part of the shift is likely to be temporary. By 2025, UBS expects one-quarter of all U.S. retail spending to be online—a trend that is seen forcing 100,000 physical stores to close by the middle of the decade.

Mall landlords face a reckoning. The Covid-19 crisis has pushed the credit quality of the average U.S. general retailer from just inside investment grade a year ago into junk territory today, according to Credit Benchmark. One U.S. owner of shopping malls, Tanger Factory Outlet Centers, said it won’t be able to collect rent that was due in April and May until early 2021. Intu, a U.K. department-store landlord, filed for the local equivalent of bankruptcy last week after tenants couldn’t make the rent.

The world’s largest owner of warehouses, Prologis, collected 95% of rent due globally in May.... — The world’s largest owner of warehouses, Prologis, collected 95% of rent due globally in May.
Photo: Studio 216/Prologis

Warehouses should be a relative safe haven. Segro, a European owner of logistics real estate, said that by the end of May, 82% of rents due for the second quarter had already been paid or were on the way shortly. The world’s largest owner of warehouses, Prologis, collected 95% of rent due globally in May. Since e-commerce sales need three times as much physical storage space as shop-based retail, vacancy rates in warehouses shouldn’t experience the same surge that now looks inevitable for office, hotel and high-street properties.

Same-day delivery is becoming an important part of retailers’ offer, so warehouses close to major urban centres are in particularly hot demand. Earlier this month, Segro bought logistics space in London at a low 3.5% rental yield, implying a high price. It expects to improve its return by hiking rents.

More generally, the investment yield on London urban warehouse space remained steady at 4% in the first quarter of this year, according to real-estate brokerage CBRE, making it one of the most resilient property sectors during the crisis. Across Europe, the yields on prime industrial real estate were lower than for prime shopping centers for the first time as demand for sheds relative to stores soars.

Stock investors already have very high hopes of the warehouse sector. Segro shares now trade 27% above the book value it reported for the end of 2019, giving investors a dividend yield of just 2.3%. Meanwhile, Europe’s largest real-estate investment trust, mall landlord Unibail-Rodamco-Westfield, trades at a massive discount to book and a double-digit dividend yield.

Even before the pandemic, the gradual drift of shopping online was making warehouses an attractive bet. Now, these unglamorous sheds increasingly look like trophy assets.