Why warehouse properties pack a punch

Fidelity's Bill Maclay unpacks his bullish view of industrial properties as growth in e-commerce drives a greater need for storage facilities.

• For multiple years, industrial properties have benefited from strong demand from commercial real estate investors, according to Fidelity Portfolio Manager Bill Maclay, who expects this to continue, despite increased supply, as e-commerce consumes an ever-greater percentage of the retail pie.
• "As retailers move operations online or pursue an omnichannel strategy, they need facilities to store their products," says Maclay, who manages Fidelity Advisor^® Real Estate Income Fund. "Compared to traditional retailing, keeping goods in a warehouse before distributing them to fulfill online orders requires far more available square footage."
• In managing the fund since 2019, Maclay seeks to achieve what he considers a reasonable total return by investing in real estate stocks and bonds, aiming for a higher yield and lower volatility than what is typically available by investing solely in real estate investment trust common stocks.
• Supply of warehouse properties has recently increased, says Maclay, but, so far, demand has been plenty strong to fill the available space.
• He sees industrial properties as a particularly strong fit for the fund because he favors real estate companies with lower capital expenditures and strong free cash flow—two characteristics widely seen in this particular segment of the real estate sector.
• "Compared to other property types, warehouses require limited capital investment because they tend to be simple structures—they're basically large boxes, which makes it straightforward for owners to build out or customize space for new tenants," he explains.
• Maclay points out that robust demand for warehouse properties has led to a rapid rise in market rent—almost 10% annually. In this favorable supply-demand environment, he has stacked the fund with investments that align with his favorable outlook for industrial properties, including various holdings in equities, bonds, preferred stock and commercial mortgage-backed securities.
• A small portion of the fund is invested in single-borrower CMBS that are secured by portfolios of warehouses. "I really like those CMBS positions because they have modest leverage, strong sponsors, and yields in the high single digits," Maclay says. "That seems like a pretty good deal to have strong credits at attractive yields in a property type that has a nice structural tailwind."
• Elsewhere, Prologis is the fund's fourth-largest holding as of June 30 and is a longtime favorite of Maclay's based on its market exposure to areas of the U.S. with particularly high potential for further growth in rent, as well as the company's top-tier management and capital allocation.
• "As strong as the industrial segment of the real estate securities market has performed in recent years, I continue to be optimistic about its potential, and I've maintained the fund's overweight exposure to this category," he concludes.