How the digital economy is reshaping real estate

As more consumers shop online, brick-and-mortar retailers are suffering. Take a look at Gymboree, Payless ShoeSource and Forever 21, all of which shut down their Canadian stores this year.

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So what does that mean for real estate investors? The growth in e-commerce has had a negative impact on retail real estate globally, says Laurel Durkay, senior vice-president and portfolio manager, global and U.S. REIT strategies at Cohen & Steers in New York.

The penetration rate of e-commerce is upwards of 10% in various advanced economies, including Canada, said Durkay, who co-manages the Renaissance Global Real Estate Fund. In some countries, that could grow to 30% or even 40%.

“When you think about the underlying impact that will have on distribution patterns, specifically as it relates to the physical real estate of these storefronts, that will result in increased vacancies, depressed rents [and] depressed cashflow growth for the companies that own these properties,” she said in a Sept. 26 interview.

However, while growth in e-commerce is bad for retail property investors, it’s good for industrial investors. That’s because there is increased demand for warehouses and distribution centres that belong to online retailers, Durkay said.

“[This sector has] been experiencing robust rental rate growth, very low vacancies, and values have significantly increased,” she said.

Industrial facilities that are close to highly populated areas have been huge beneficiaries of e-commerce demand because of warehouses’ position in distribution channels, she said. This has led to higher rents and a significant increase in value.

“We have, generally speaking, not had a large weight in property owners that have a significant portion invested within retail real estate,” she said.

“Instead [we] are positioning our portfolio to take advantage of the positives of this retail evolution, which really is going to be within the industrial warehouse facilities.”

Real estate in the digital economy

Durkay also likes the technology real estate sector, especially the data centres and cellphone towers that form the foundation of a global digital economy based on transferring information. Many areas of the world are still in the “early innings” when it comes to demand growth for transferring data, she said.

“You always need to be cognizant of where supply is, and the ability of new supply to come online,” said Durkay.

While there are “pockets of new supply coming online” in the data centre space, it’s still limited, she said. “In most major markets, you’re seeing demand outstrip supply and, therefore, fundamentals are very, very strong.”

Valuations for individual securities in the data centre space represent “a great opportunity,” she said. “Cashflow growth is significantly above average, and valuations are attractive on a relative basis.”

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