This New Type of “Mall” Is America’s Hottest Real Estate Market

During my Rust Belt Tour last month, I traveled across seven states. I wanted to see how the economies of American industrial centers were doing.

Regular Daily readers know what I found: The economy is doing much better than the mainstream media is telling you.

But during the trip, I kept running into something unexpected…

From Detroit to Milwaukee to Indianapolis, I saw dozens of new, gleaming buildings going up across the heartland.

They weren’t luxury condos, apartment buildings, or shopping centers.

They were warehouses.

When I got back to the office, I started looking into this trend…

  • In the Chicago area, 28 property users are in the market for 18 million square feet of warehouse space. That’s triple the available supply in that market.

  • In Dallas, more than 14 million square feet of warehouse space is under construction.

  • In Pennsylvania’s Lehigh Valley, developers expect warehouse space to increase from 39.4 million square feet to 72.2 million square feet.

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Today, warehouses are some of the hottest properties in the country. Since 2015, warehouse rents are up over 10%. That’s compared to a 3% rise in apartment rents.

And the building boom is just getting started.

Shoppers are changing their habits. They’re buying more stuff online than in malls or at traditional brick-and-mortar retailers.

This trend is going to create more demand for warehouses. After all, companies like Amazon have to store all those goods somewhere before they’re shipped out.

If you’re not familiar with industrial real estate like warehouses… I’ll show you a few simple ways to play this trend. But first…

The Changing Face of the Shopping Landscape

Online shopping is creating demand for warehouse space across the country. And the biggest player in this space is e-commerce giant Amazon.

Amazon is taking a wrecking ball to traditional brick-and-mortar retailers, especially malls. I call this phenomenon getting Amazon’d.

As I’ve written before, Amazon is steamrolling the entire retail sector. But the steamroller is also paving the way for warehouses.

You see, Amazon has built a massive network of distribution centers.

In 2016, the company had 40 distribution warehouses of 1 million-plus square feet dedicated to e-commerce.

The next biggest player in this space is Walmart. The retailer giant plans to double the number of e-commerce warehouses it owns from five to 10.

During my Rust Belt Tour, I saw this warehouse being built in Indianapolis

Financial research firm Green Street Advisors estimates that online sales boosted warehouse real estate growth between 30% and 40% in 2016.

“Occupancy and rent growths are at historical highs…We expect this trend to continue in the foreseeable future, as online sales continue to grow faster than brick-and-mortar,” one of the firm’s analysts said.

I expect more warehouses to be built as Amazon and Walmart increase same-day delivery services. Same-day delivery requires smaller warehouses closer to customers to ensure they receive their packages the same day they order them.

So this trend is just warming up.

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Warehouses Are Becoming the New Malls

As more people shop online, warehouses will become the new malls.

One way you can invest in warehouses is through real estate investment trusts (REITs). Several industrial REITs focus on warehouses.

In the chart below, you can see that warehouse REITS outperformed mall REITs over the past year.

Warehouse REITs returned 19% over the past year, while mall REITS lost 19%.

As long as e-commerce continues to outpace traditional shopping, the demand for warehouses will grow.

The table below contains the five biggest warehouse REITs you can buy in the United States. It’s a good place to start your research.

Company

 Ticker 

Prologis

PLD

Duke Realty

DRE

DCT Industrial Trust

DCT

PS Business Parks

PSB

First Industrial Realty Trust

FR

If you’re wondering how to make money on retail’s woes, look for warehouse companies. The goods need to be stored somewhere.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

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ELITE 25 JULY UPDATE

Each month, we update our Elite 25 portfolio. We remove stocks that are too expensive and replace them with new stocks that meet our three criteria for elite status.

After a rough month in May, the Elite 25 portfolio bounced back in June and gained an average of 2.1%. That crushed the S&P 500, which returned -0.1% for the month.

The biggest winner in June was Stamps.com (STMP), which gained 14.4%.

Stamps.com pretty much has a monopoly selling U.S. Postal Service (USPS) stamps. That monopoly allows the company to keep up profits during any type of market.

Investors have caught on and bid up the stock. That’s good for those of you who bought in May. But since it’s up so much, it’s now too expensive to keep in the Elite 25.

We have one new buy this month: computer networking company F5 Networks (FFIV).

Portfolio Changes

The buy is F5 Networks (FFIV). The sell is Stamps.com (STMP).

Click here for the updated Elite 25 list.

[Palm Beach Letter subscribers can read our Elite 25 special report right here. If you’re not a PBL subscriber, you can read more about the portfolio here.]

Nick Rokke

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