Behind those Amazon Prime boxes, a bull market in warehouses

Thu Jun 23, 2016 3:27pm EDT
 
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By David Randall

NEW YORK (Reuters) - With Amazon and other e-commerce sites continuing to take market share from malls and other physical retailers, U.S. mutual fund managers are upping their bets on an overlooked part of the online shopping boom: warehouses.

Real estate investment trusts (REITs) that own the distribution centers required to fill all those Amazon Prime boxes are a growing favorite on Wall Street after two years of underperformance compared with the broad real estate market.

In large part, the move comes about because of changes in the supply chains of online retail giants like Amazon.com Inc (AMZN.O: Quote) over the last few years as they focus on fast, two-day shipping.

Whereas a traditional retailer might send a pallet full of merchandise to a store, online shippers send out individual packages. That requires significantly more space to hold greater amounts of inventory on hand and to route all those boxes, said Eric Frankel, an analyst at research firm Green Street Advisors.

That has allowed companies such as Prologis Inc (PLD.N: Quote) - which counts Amazon among its largest customers - to raise rents a record 20.1 percent in the first three months of the year. Even with the rent increases seen this year, warehouse occupancy rates are at their highest since 2000, making rent spikes across the industry likely for newer, modern warehouses near major cities, according to Green Street.

"We think the shift to e-commerce is just going to create more demand for warehouses and while those aren't the sexiest parts of the industry, that's where the demand is," said Nate Weisshaar, a portfolio manager at Motley Fool Asset Management. He has been adding to his position in Stag Industrial Inc (STAG.N: Quote), a warehouse company whose shares are up 24 percent year-to-date.

Total fund ownership of real estate companies such as Prologis Inc and Duke Realty Corp (DRE.N: Quote) has jumped by 30 percent or more over the last quarter, according to Morningstar data. At the same time, their share prices are up 15 percent or more for the year to date, well outpacing the 3-percent gain in the benchmark S&P 500, or the 9.9-percent increase in the Dow Jones All REIT index.

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Workers prepare outgoing shipments at an Amazon Fulfillment Center, ahead of the Christmas rush, in Tracy, California, November 30, 2014. REUTERS/Noah Berger