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Laurel Durkay, senior vice president, portfolio manager at Cohen & Steers.
Secular changes in the consumer behaviour has had really far-reaching impacts on real estate and real estate fundamentals across the globe, particularly when you think about the growth in e-commerce and online sales, and consumer preferences as it relates to how they are getting goods: not focused on physical brick-and-mortar retail locations, but instead via a more omni-channel distribution. That has had a negative impact on retail real estate in the U.S., in Canada, in Europe, in the U.K., Australia, in Japan. It really is reaching almost every area of the globe.
When you look at the retail evolution and the actual manifestation of how that is impacting retail real estate, we really think that the most important thing to look at is the e-commerce penetration rate in these individual economies. And to the extent that penetration rate is upwards of 10%, that is having a pretty devastating impact on the traditional brick-and-mortar retail environment.
There are some countries where we believe that e-commerce penetration rate can grow upwards of 30% to 40%, and when you think about the underlying impact that will have on distribution patterns, specifically as it relates to the physical real estate of the storefronts, that will result in increased vacancies, depressed rents, depressed cash-flow growth for the companies that own these properties, and will be very far reaching in the overall retail landscape.
However, when you think about distribution, I think it’s really important to also note that there’s a positive here as it relates to real estate, and that’s because the way in which the goods have now been distributed is through the logistics and warehouses across the globe. And so when you think about the negative for retail real estate, it’s definitely a positive for industrial real estate and logistics. What we have seen is that logistics has significantly increased demand drivers in almost all parts of the world and have been experiencing very robust rental rate growth, have very low vacancies, and values have significantly increased for that property type.
I specifically want to highlight the fact that urban infill logistics have really been a huge beneficiary of the growth in e-commerce. To the extent you have a real estate facility, an industrial facility that is very proximate to dense infill highly populated areas, that has become more in demand today than ever before because the distribution channel via a warehouse is growing in popularity, and the rents at these more dense urban infill locations have increased very significantly and the value has increased significantly. So when we’re thinking about our portfolios, we have, generally speaking, not had a large weight in property owners that have a significant portion invested within retail real estate, and instead are positioning our portfolio to take advantage of the positives of this retail evolution, which really is going to be within these industrial warehouse facilities.
One of the higher-conviction areas we have expressed within our portfolio is definitely within what we would call the technology real estate sector. The technology real estate sector is going to be really made up of data centres and cellphone towers across the globe. When you think about the evolution of the digital economy, what that is really helped, the foundation of that digital economy is going to be data centres and cell phone towers. Data has been growing exponentially, and that really is helping to facilitate information transfer and facilitate what this digital economy is built upon. The data centres and the cellphone towers are really serving as the foundation for supporting that data transfer. When we think about secular demand drivers, specifically within the data centre and cellphone tower space, we believe that we’re really in the early innings in many areas of the world as it relates to demand growth.
Of course when thinking about real estate, you always need to be cognizant of where supply is and the ability of new supply to come online. There are pockets of new supply coming online within the data centre space. However, we believe it is rather limited in nature and in most major markets, you’re seeing demand outstrips supply, and therefore fundamentals are very, very strong. When you look at the valuations of the individual securities within the data center space, we also believe that that represents a great opportunity. Cash-flow growth is significantly above average, and valuations are attractive on a relative basis.