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Morningstar | Duke Realty Continues To Be in the Right Industry at the Right Time

Duke Realty has enjoyed a solid run, shifting its portfolio from suburban office properties to become the leading domestic-only industrial REIT in the United States. The company has capitalized on depressed supply and an explosion of growth driven by a better economy and the rise of e-commerce. However, with industrial vacancy rates at record lows, investors may be late to the party, as supply has increased to levels not seen since 2007, posing a significant threat to Duke Realty’s ongoing success in the medium term.As we note in our no-moat argument for the company, Duke Realty’s properties are largely commoditized, with locations that are often along highways, miles away from metropolitan areas. While prices for this type of land have risen over the years, the structures are easily replicable, causing other real estate companies to throw their hats in the ring, diversifying to meet the demand for industrial property.Major retailers continue to shift their strategies as brick-and-mortar shopping loses ground to its online counterpart. Fortunately for Duke Realty, warehouses that support e-commerce sales require more space, up to three times as much as traditional retail warehouses. While e-commerce currently accounts for only about 10% of total retail sales, its piece of the pie is growing at a double-digit pace annually. We eventually see additional supply bringing Duke Realty’s returns to the cost of capital, since nothing prohibits new entrants to this market. Despite the competitive future of this industry, Duke Realty has an established presence and first-mover advantage in many high-quality markets. The company's tenants typically sign leases for an average of seven years, so it may take some time before we see the effects of new construction on returns.