Some E-Commerce Drivers For Industrial Are 'Misleading'

The exponential growth in e-commerce sales is a “misleading signal” for the industrial market, says Real Capital Analytics’ Jim Costello–and savvy investors should watch out for the inevitable slowdown. 

“The thing about exponential trends is that they only match into the future for some time, then everything starts to fall apart,” Costello writes in a recent post.  “Before the pandemic, that sort of breakdown in the pattern of growth for e-commerce activity was already underway… Fundamentally, e-commerce growth should slow at some point to a pace more like that set by disposable personal income as it starts to capture a greater share of total consumer spending. The uncertainty here is exactly when the slowing begins.”

From 2003 to 2016—before e-commerce drove nearly every facet of consumer purchasing behavior—industrial deal volume represented just 15% of investment in the so-called “big four” (office, retail, apartment, and industrial). During that period, Costello maintains, “industrial sector was long viewed as sleepy and slow-moving, and few investors saw exciting opportunities within such a low volatility sector.”  In 2003, less than 2% of all consumer purchasing happened online, but that figure began growing by about 50 basis points per year until 2014, when it began to pick up major steam.

By 2016, investor interest in the sector also began to climb, and by Q1 2021 industrial investment accounted for 26% of all CRE investment activity in the US. RCA’s Costello predicts that e-commerce sales will likely reach 20% market share by 2024.

Another misleading signal: the spike in activity wrought by the COVID-19 pandemic. During the worst part of the pandemic, online sales accounted for 15.7% of all sales, which would have put e-commerce sales at 16% of total by the end of next year, Costello says. Essentially, we’d see two years of growth in e-commerce’s market share in a single quarter.

But “any investor who set their expectations for the industrial sector moving forward based on that one spike is likely to be disappointed,” Costello says, calling the spike a “temporary shock that was “not indicative of the future trend.” He notes that as brick and mortar distribution channels begin their post-COVID bounceback, e-commerce activity has declined to 13.6% share as of the first quarter.

“Make no mistake, there is a lot to like about the industrial sector,” he says. “All of the performance characteristics that made the sector boring in the past are now en vogue. Stable yield with low capex relative to the NOI … what’s not to like? Still, if one is undertaking an investment strategy that will only work if there is continual exponential growth in e-commerce activity, one might be disappointed as that industry matures.”