Most Read Articles
Demand for inventory, e-commerce fuels long-term outlook for logistics real estate
Logistics real estate experts are maintaining their long-term positive outlook for the sector despite worsening economic conditions as the COVID-19 pandemic ramps up in the United States.
A report from logistics real estate giant Prologis predicts that the need for inventory and the re-acceleration of e-commerce adoption due to the crisis will drive long-term demand for logistics real estate—despite the near-term effects of a slowing economy. The March 19 report was a follow-up to an earlier report pointing to the resiliency of the logistics real estate market, which is due in no small part to e-commerce related growth activity, according to Chris Caton, head of research for Prologis.
"In the current environment, e-commerce seems to remain resilient," Caton said in a mid-March interview, emphasizing related demand for industrial facilities that support last-mile and urban delivery needs. "The concept of last-touch delivery [and] urban logistics has been an important, multi-year trend that is likely to continue."
In the follow-up report, Caton and his colleagues point to five themes that are shaping near-term logistics real estate market conditions, with COVID-19 at the top of the list:
- COVID-19 and recessions. The coronavirus outbreak in the U.S. and Europe, and corrective measures, has become significant. Economic activity has come to a near-standstill in the hardest hit markets, including potentially creating high risk for small and medium sized businesses. Logistics real estate demand will be hit, although the depth of the downturn is yet to be seen. In response to the weakening economic picture, meaningful fiscal and monetary stimulus measures have also been announced globally.
- Strong momentum. Over the last several years, customer demand has consistently outperformed expectations, growing by [250 million to 300 million square feet] in each of the last several years, driven by supply chain modernization and e-commerce. In the U.S., vacancy rates fell from 10% in 2010 to below 5% in 2019, a historically low level and 280 [basis points] below the low reached in the prior cycle. At this level, it would take more than [350 million square feet] of vacant deliveries to get back to an equilibrium rate of 7%.
- Resilience amid diverse demand. Overall leasing activity remained consistent in February and early-March, even as the outbreak broadened. On the ground, we're seeing activity from those who serve essential daily needs (via e-commerce and rapid replenishment to stores), such as food/beverage, consumer products, and general retailers. Healthcare (medical equipment, supplies, pharmaceuticals), which represents nearly 5% by NRA (net rentable area) of our customer base, could see more activity. That growth should help to offset hard hits to customers in the events/travel/hospitality and automobile industries.
- Shipments from China. We expect a one-time boost as goods start to flow through supply chains from China. Some customers are concerned about capacity, as the significant catchup volume from China is expected to land in April and May.
- Slowing development starts. Developers have begun to delay starts, and construction financing has declined in availability. The trend is more pronounced for speculative projects versus build to suit. In addition, work on projects already underway in areas with the worst outbreaks has slowed due to work restrictions and a pause in inspections in a range of municipalities. Some of these trends may be seen in volumes for March and Q1'20, when available, but decision-making today will have a more pronounced impact on starts volumes in April and beyond.
But despite the concerns, the overall outlook remains solid.
"The business has pretty good momentum, and was healthy heading into this, particularly in the U.S. but also in Europe and Japan," Caton said. "There was really good momentum. Deals were getting made, activity was good in the States. And there is a good amount of variety in our space."
All of which bodes well for the long term, he said.
Join the Discussion
After you comment, click Post. If you're not already logged in, you will be asked to log in or register.
We Want to Hear From You! We invite you to share your thoughts and opinions about this article by sending an e-mail to ?Subject=Letter to the Editor: Quarter : Demand for inventory, e-commerce fuels long-term outlook for logistics real estate"> . We will publish selected readers' comments in future issues of CSCMP's Supply Chain Quarterly. Correspondence may be edited for clarity or for length.