The once in a century pandemic has both spawned and accelerated big changes in how we use real estate. Perhaps unsurprisingly, those changes are creating winners and losers. One example is e-commerce and its effect on retail and industrial property, as our Chart of the Week shows. Historically highly correlated, U.S. industrial buildings (primarily warehouses) produced an unleveraged total return of 11.8% in 2020, while retail centers delivered a -7.5% return.
Online shopping existed long before Covid-19, but the lockdown pushed its growth into overdrive. E-commerce jumped 37% year-over-year in the third quarter of 2020, going from about 13% to 16% of retail sales virtually overnight. It is probably no coincidence that we saw 45 major retail bankruptcies in 2020, almost twice of what we saw over all of 2019.
This has been a major blow to U.S. malls, which typically host a large contingent of at-risk department and apparel stores. At the same time, it has been a boon for industrial real estate, which is critical to the rapid fulfillment of e-commerce orders (as well as the processing of their returns, which are double those of in-store purchases). A Covid-driven diversion of consumer dollars from services to goods has amplified these trends.
We think these changes have a lot further to run. Some high-quality malls will survive and thrive post-Covid, likely evolving into entertainment destinations. But they will continue to fight an uphill battle with e-commerce. We prefer grocery-anchored retail destinations. In the short-term, they also face challenges from tenants like gyms and restaurants that have been forced to close or restrict their capacity as a result of the health crisis. But over the long-term their mix of necessities and services should be more resistant to e-commerce. In fact, demand for these kinds of assets will probably increase, particularly in geographical areas that are experiencing growing populations. As always in real estate, location matters.
On the industrial side, at some point the sector might get overbuilt and overpriced, but there is no sign of that yet. For now, we believe that prospects for U.S. industrial property remain bright.
* total returns (trailing four quarters)
Sources: NCREIF and DWS Investment GmbH as of 12/31/20