The Trends Behind Industrial REITs' Underperformance This Year

After outperforming the broader REIT industry for the last six years, industrial REITs have underperformed thus far in 2021, with total returns of 11.3%. This development could be justification for observers who have long decried the sector’s valuation as frothy. But a new report from BTIG notes that pandemic-era shifts in online shopping and consumption will be the new normal post-COVID, suggesting that demand will remain robust in both the near- and long-term. 

So far this year, industrial REIT performance figures trail retail REITs, with malls and shopping centers up 33.6% and 32% respectively, and hotels, which are up 17.5% year-to-date. These sectors are now in recovery mode from the pandemic and their returns are reflecting that.

Industrial has long-term advantages that will continue to propel its growth, BTIG notes. While a record amount of supply has been added over the last few years, BTIG notes that inventory restocking created a “tailwind of demand” so far in 2021.  And while e-commerce’s share of retail sales declined from 16.1% in the second quarter of 2020 to 14% in Q4, the gross dollar value of online sales has increased 28% versus traditional retail’s 14.7% increase. Add an aging millennial population to the mix—which BTIG says could provide another tailwind to consumption and demand for the sector—and the net result is that industrial fundamentals remain strong.

In addition, “demand driven by e-commerce growth, supply chain reconfiguration, population growth, and inventory restocking suggest that new supply is not a material near-term risk,” the report notes.

BTIG analysts predict more remote markets with ample land for new industrial supply and fewer development restrictions could be the first to be hit by decreased demand, especially when supply chain modernization trends stabilize. And on the flip side, REITs with portfolios in more densely-populated or growth markets with more restrictive development standards will likely see a “longer, stronger cycle of growth.”

“While we recognize investor concerns that the industrial sector has reached lofty valuation levels (though more reasonable now than in recent years), we reviewed the past 25 years of development deliveries, 30 years of retail sales, and 40 years of population growth and conclude that the secular tailwinds behind the industrial sector remains fully intact, and we expect industrial REITs to generate above average earnings growth and value creation for the foreseeable future,” BTIG analysts noted in the report.