RREEF Property Trust distribution center located in Seattle, Washington’s Eastside submarket.
By: Eric Dutram, assistant vice president of thought leadership, DWS Group
For top performers in real estate, the conversation usually focuses on the industrial sector. This segment, which had arguably been under-appreciated by investors before this cycle, has beaten its counterparts in office, apartment and retail. In fact, industrial has pacedits rivals in terms of income over the past year, while it has broadly outperformed other sectors both in terms of appreciation and total return.
This strength in industrial real estate is largely thanks to the continued e-commerce shift. In order to accommodate transit times of a single day as well as high levels of customer returns, additional supply could be needed, particularly given that e-commerce still accounts for less than 13% of retail sales. However, it isn’t all strength for industrial at this point in the cycle. With recent market volatility and growth concerns, there are broad economic risks on the horizon and industrial is not immune from these more sluggish conditions.
While it is important to note these risks, we believe these concerns may be partially mitigated by concentrating on strong areas of the market. We think this can be done by focusing on two key characteristics of industrial real estate; land supply constraints (limits on development) and functional obsolescence (age and features of properties). In our view, these are two strategic considerations that can impact performance late in a real estate cycle.
Key factors for industrial real estate
Investors have seen sizable gaps in performance between high and low barrier markets for both older and newer vintages. Recent performance suggests that location appears to be a vital characteristic, as high barrier markets have offered durable levels of outperformance in both newer and older vintages, across a variety of time frames.
Trends also suggest infill warehouses could remain excellent choices, at least in locations where prime space often comes at apremium. That said, many larger coastal markets were built-out by 1990, so modern stock is scarce in these locations and higher prices often result for infill options. Still, older stock has performed well in high barrier markets, though in low-barrier locations, older stock loses to newer facilities in expanding submarkets where finding quality infill isn’t a problem.
These trends also suggest that location may be more important for industrial users than a property’s features, especially in constrained cities where access to urban cores are limited by congestion and competing uses. As a result, infill locations have become more valuable with the continued rise of e-commerce and rapid fulfillment.
The higher rent is more than offset by lower transportation costs and time-to-consumer benefits for tenants. The marginal demand increase for close-in locations lately has likely lifted costs for all industrial users seeking infill, and this has been reflected in returns for olderassets in high-barrier markets, as well as in lower-barrier metros. These may be important lessons for real estate investors as the current economic cycle continues, and especially if e-commerce adoption remains at its current pace.
Industrial real estate has been on an impressive run and future trends appear supportive. However, there are macro risks on the horizon and investors may not want to simply buy any piece of industrial real estate. Instead, giving a critical eye to two key factors—high vs. low barrier and “vintage” of properties—could make a meaningful difference, particularly if economic conditions remain uncertain ahead.
Visit rreefpropertytrust.com for details about RREEF Property Trust—a diversified, core real estate strategy offering exposure to U.S. industrial, retail, apartments and office properties. Obtain the prospectus. You should purchase these securities only if you can afford the complete loss if your investment.
Diversification neither assures a profit nor guarantees against loss.
Industrial market barriers are defined by the supply of land that is available for industrial development.
High-barrier markets –This can be exhibited by the measured growth of industrial stock over time, combined with the observed supply of land. Markets where the base of industrial stock has grown slowly, or declined, are higher barrier markets and include markets such as Los Angeles, Orange County (CA), Oakland, New York, New Jersey, and Seattle.
Low-barrier markets –This can be exhibited by the measured growth of industrial stock over time, combined with the observed supply of land. Markets with high rates of industrial base expansion have lower barriers and include locations such as Atlanta, Chicago, Dallas-Fort Worth, Phoenix, Houston, Indianapolis, Allentown (PA), and Harrisburg (PA).
This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements. This sales literature must be read in conjunction with a prospectus in order to understand fully all the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with the offering described herein. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of our securities or determined if our prospectus is truthful or complete. Neither the Attorney General of the State of New York nor any other regulatory body has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Information provided by RREEF America, L.L.C. Securities offered through DWS Distributors, Inc.
Risk Factors: RREEF Property Trust is a speculative security and, as such, involves a high degree of risk. An investment in us involves the same risks associated with an investment in real estate, such as market risk, interest rate risk, risks related to property diversification, tenant turnover and the use of leverage. There is no guarantee that any real estate strategy, including ours, will be successful. There is no public market for our shares of common stock. Our shares should be considered as having only limited liquidity and at times may be illiquid. Our redemption of shares will likely be the only way for you to dispose of your shares, and our redemption plan contains limitations on the number of shares we will redeem in any calendar quarter. Our board of directors may modify or suspend our redemption plan, as well as our investment policies without stockholder approval, which could alter the nature of your investment. The purchase price and redemption price for our shares is based on our NAV, which may not accurately reflect the actual price at which our assets could be liquidated on any given day because valuation of properties is inherently subjective. Our failure to remain qualified as a REIT would have an adverse effect on our operations and our ability to make distributions to our stockholders. Distributions are not guaranteed, are made at the discretion of the board and may be paid from sources other than cash flow from operations, including, without limitation, the sale of assets, borrowings or offering proceeds, and we have no limits on the amounts we may pay from such sources. We are dependent upon our advisor to conduct our operations, and our advisor will face conflicts of interest as a result of, among other things, time constraints, allocation of investment opportunities and the substantial fees we will pay to our advisor. The value of the shares of the trust will fluctuate with the portfolio of the underlying real estate properties. Shares sold will be at a price which may be more or less than the original price paid for the shares by the investor. Investors can be subject to adverse tax consequences if the REIT does not qualify as a REIT for federal tax purposes. In addition, distributions from current or accumulated earnings and profits are taxed as ordinary income. Data provided by RREEF America, the Advisor to RREEF Property Trust.
Investment products: No bank guarantee | Not FDIC insured | May lose value
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