Duke Realty Corp. is an industrial REIT that specializes in the development, ownership, leasing, and management of logistics warehouses and distribution centers in 19 markets across the United States. Duke's business model is directly driven by the e-commerce industry. Right now, there's a major upward trend in e-commerce with estimations expecting that as much as 30% of retail sales will be made online by 2030 -- more than double today's number.
COVID-19 accelerated the online shopping trend and resulted in record low vacancy rates and the opportunity for increased rental rates for warehouse operators. Net effective rent growth for Duke Realty in the first quarter of 2021 was 11.4%, providing a major boost to its revenues. As of Q1 2021, the company had interest or ownership in 543 facilities equating to 162 million square feet. Its portfolio is 97.6% leased, and of its $412 million in development starts, 60% are pre-leased.
CubeSmart is an industrial REIT that specializes in the ownership and management of 1,244 self-storage facilities across the country. The self-storage industry is in somewhat of a recovery mode after overdevelopment in the past few years. Excess supply in many markets led to higher vacancy rates and lower rental rates, which ultimately pushed revenues down for REITs like CubeSmart. However, Q1 2021 is showing positive signs for recovery and future growth. Net operating income (NOI) grew 8.9% and funds from operations (FFO) grew 14.6% year over year. Much of its portfolio is in high-density urban markets where land cost and cost to enter are high.
The company, which has exposure to growing Sun Belt markets including Miami, Atlanta, southern California, Phoenix, Dallas, and Houston, also has a large portion of its portfolio in the Northeast including several New York City boroughs, Boston, Philadelphia, and Washington, D.C., which is experiencing somewhat of an exodus after the pandemic.
The good news is that CubeSmart is in the business of storing things. Many people fled New York in search of a lower cost of living and more space, but as workers return to the office, many residents will be returning to these major markets and bringing their new stuff with them. This could lead to an uptick in demand for CubeSmart over the next year or so. Occupancy was 94.4% at the end of Q1 2021.
Which is a better buy?
In all honesty, both are compelling buys. Both companies have provided consistent returns and have low payout ratios and high-quality portfolios. However, in today's market, the warehouse and distribution industry has greater trends backing long-term demand over the next decade, meaning Duke Realty is the better buy today. Duke Realty has outperformed CubeSmart for annualized returns and price growth over the past five years.