Report: Logistics real estate well positioned to weather coronavirus-related volatility

As the COVID-19 outbreak continues to threaten global supply chains, at least one segment of the logistics industry is maintaining a positive outlook: real estate. Although sure to feel negative effects in the short term, logistics real estate is likely to prove resilient in the longer term and generate positive demand via rising inventory levels and accelerating e-commerce adoption, according to a March study by logistics real estate firm Prologis.

But there will be pain before the gain. COVID-19, the respiratory illness that began in China and is now a global pandemic, has slowed manufacturing activity in China and stalled cargo shipments from the region. In a March 6 presentation, executives from supply chain software firm Resilinc reported a 20% drop in ocean traffic from China since the outbreak began and noted that many ships are leaving the region only partially full—in some cases at 20% to 35% capacity. U.S. ports are feeling the effects of the situation; the Port of Oakland reported a 9% drop in February imports Friday, citing the effects of COVID-19 on manufacturing and the supply chain.

Such heightened supply chain risks introduce new long-term trends that could boost demand for real estate, however. Prologis says the slower movement of goods will lead to a shortage of activity in logistics real estate in the near term followed by a replenishment surge later on. Rising demand for e-commerce and increasing diversification of manufacturing locations may also affect the outlook.

"Historically, this kind of volatility has correlated with stronger demand for logistics real estate. Two examples—Brexit and the U.S.-China tariff implementation—were followed by historically strong levels of net absorption in the UK and U.S.," Prologis wrote in its special report COVID-19 and Implications for Logistics Real Estate.

In the short term, Prologis says demand may soften, freeing up space. But the situation could be short-lived as some customers "race to gain lost ground and expand their needs for facilities in support of business continuity and higher service levels." 

Uncertainty remains a key factor, however, and the authors emphasize that COVID-19 remains the most serious risk so far to the lengthy global economic expansion. But they point to three areas of change that, together, may translate to higher levels of demand for warehouses and industrial space once the uncertainty has subsided: 

Rising inventory levels. "By design, supply chains minimize inventories to distribute goods at low cost. They don't tolerate volatility, which leads to lost sales and revenues. In the past, events such as natural disasters and work stoppages at ports have led to step changes in inventory practices," the authors wrote. "In the wake of COVID-19, customers are likely to reassess ideal inventory volumes and business continuity plans—which could translate to greater demand."

Continued e-commerce adoption. "The current expansion has been characterized by the emergence of online shopping, which grew by 16.7% globally in 2019," the authors also wrote. "COVID-19 doesn't seem likely to change any of that; instead, it may increase the speed of adoption and the number of consumers who shop online. Given its value proposition, especially in the hardest-hit markets, e-commerce may rise in even greater importance in the basic functioning of everyday life."

Diversifying manufacturing locations. "COVID-19 may accelerate another structural trend: pushing manufacturing to new locations. Aided by industry 4.0 trends that boost productivity, manufacturers have been evolving their global supply chain strategies, increasingly emphasizing near-adjacent locations (such as Mexico and Central and Eastern Europe) alongside reshoring," they wrote. "Strategies that focus on the consumption end of supply chains will not be affected by these trends. While production-end locations alone are not a major investment strategy, this broadening of manufacturers creates second-order demand through both suppliers and networks that serve blossoming consumer markets."