With the Holidays Approaching, E-Commerce Infrastructure Proves Essential

November 10, 2021

As the holiday season approaches, many shoppers will rely on a segment of infrastructure that is becoming increasingly more vital to the U.S. economy: e-commerce infrastructure.

Consumers’ growing reliance on e-commerce highlights the importance of the infrastructure that underpins it and demonstrates why some industrial REITs tied to the trend are a part of Reaves’ essential service infrastructure portfolios.

The number of packages moving through U.S. shipping infrastructure continues to grow as evidenced by the 24.4% jump in online retail sales for the year ended 6/30/21.1 The spike in e-commerce sales during the pandemic, we believe, has helped many consumers who were previously reluctant to shop on their laptops or mobile phones, become more comfortable with the process. As the chart below shows, while ordering through Amazon or other sites might be routine for many, e-commerce penetration is still relatively low as a percentage of total retail sales.

2021.11 E-Commerce Infrastructure Chart

What does this mean for infrastructure?

To support e-commerce growth, companies such as Amazon require large distribution facilities. These facilities must also be in or near large urban centers, where most e-commerce customers are located. Industrial REIT companies own the real estate that facilitates this distribution and, we believe, should be prime beneficiaries of the e-commerce trend over the next decade.

These locations have scarcity value given limited land availability, zoning challenges, and alternative uses, such as apartments, that command higher rents per square foot. An e-commerce retailer may be willing to pay a premium for the superior location as real estate is typically about 5% of its total operating expenses, which is more than offset by the benefits they reap such as speed of delivery to consumer.

Industrial REITs currently own and, we expect, will continue to develop the distribution and warehousing infrastructure necessary to accommodate the future growth expected in e-commerce. Their characteristics, including steady growth and superior locations that provide high barriers to entry, are some of the reasons we focus on infrastructure businesses supporting our modern economy.

Expect these companies to play a vital, behind the scenes role, supporting shoppers through the holiday season.

The Case for Essential Service Infrastructure

 

Disclosures and Definitions:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, employee-owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 U.S. Census Bureau News, Quarterly Retail E-Commerce Sales 2nd Quarter 2020, published on August 18, 2020; and U.S. Census Bureau News, Quarterly Retail E-Commerce Sales 2nd Quarter 2021, published on August 19, 2021.

Source of Chart: https://fred.stlouisfed.org/series/ECOMPCTSA

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

E-commerce penetration is a term that means the percent of retail sales that are conducted electronically as a percentage of all retail sales (both online and in physical stores).

Scarcity value is an economic factor describing the increase in an item’s relative price by an artificially low supply.

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