Report: Window of Opportunity to Jump into Logistics Real Estate Could Be Short

By Meghan Hall 

While the current pandemic has forced many in the commercial real estate industry to press pause while evaluating the economy and property fundamentals, a new report issued by Prologis indicates that any window of opportunity for companies to break into or expand their logistics presence may be short-lived. Strong fundamentals preceding the pandemic, plus accelerated changes in the retail environment, could bolster the logistics industry as recovery begins.

The most relevant trend driving changes in the industry, according to Prologis’ Senior Vice President, Global Strategy Chris Caton, is that e-commerce is booming. Those who had not used online retailers before are now doing so, and those who had been used to online shopping are increasing their usage. While, Caton admits that the impact of such rapid e-commerce adoption is not yet entirely clear, Prologis believes its rate of growth will be higher than normal.

“It is a little early to tell because we are 90 days in, and change doesn’t always happen as fast as we expect,” explained Caton. “It seems to me that we are going to have two or three years of e-commerce growth occurring in one year.”

Prologis, San Francisco, Seattle
Graph Courtesy of Prologis

Prologis estimates that the adoption rate for e-commerce on the consumer side will jump between 350 to 500 basis points this year. Over the past five years since Prologis began studying the relationship between retail and logistics, e-commerce adoption has increased by roughly 100 basis points annually. U.S. e-commerce penetration increased to 25 percent in April of 2020. By comparison, 2019 closed out at just 15 percent. Pre-pandemic forecasts predicted that e-commerce penetration for 2020 would hover at about 16.9 percent.

Because of demand, e-commerce is now representing about 20 percent of new leasing and as much as 15 percent of Prologis’ portfolio.

This is a positive sign for the logistics industry at large, as typically e-commerce customers require three times the amount of space that traditional retailers need for their goods.

“We have studied this three-times multiplier…e-commerce customers are very intensive users of logistics real estate,” said Caton. “There has been this resiliency of use whereby e-commerce customers use three times the space when compared with traditional through-put distribution.”

According to Caton, e-commerce’s need for more space is in part due to larger volumes of inventory, greater product variety, space-intensive shipping operations and the ability of e-commerce companies to accept returns, also known as reverse logistics.

“2020 is a challenging year to say the least, economically and obviously with coronavirus, but as we begin to look out into the medium- and long-term, we would expect the demand growth for logistics real estate to be higher than it was historically,” added Caton.

Supply chain growth will also continue in the years to come, and those in the e-commerce industry will look to strengthen supply chains as a result of coronavirus. That means that suppliers will likely want to carry between five to 10 percent more inventory in the future, as opposed to carrying less for the sake of being lean and efficient.  Continuation of the Stay-at-Home economy will continue to push for increasingly resilient supply chains.

And, while some brick-and-mortar retailers have declared bankruptcy in light of conditions caused by coronavirus, thus far those retailers have accounted for less than 20 basis points of total U.S. logistics real estate market inventory. This is in part because bankruptcy does not necessarily mean shutting down operations, and retailers are just a small fraction of the diverse number of industries who utilize logistics space, such as wholesalers, manufacturers and other service providers.

With these fundamentals in mind, Prologist predicts that the logistics real estate sector will remain relatively stable moving forward, and could be well poised for growth as normal operations resume post-pandemic. Well-located spaces near large population centers, especially on the coasts, will continue to garner attention from investors moving ahead.

“Against this backdrop is some real scarcity in the United States,” said Caton. “Vacancy rates are in the 4.6 percent range, and they’re near all-time lows…There is certainly some short-term volatility with respect to all of the economic noise that is out there and the need to come back from that. But pretty quickly the marketplace could stabilize and grow again.”

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