The Future of Logistics Real Estate
The Counselors of Real Estate recently released their 2021-2022 edition of the “Top Ten Issues Affecting Real Estate.” At the top of the list are the usual trends that have been disrupted by COVID-19, such as the shift to remote work. But logistics, an arguably underrated real estate trend with an increasingly profound impact on the others on this list, sits at #4. And as this article will reveal, logistics is a trend that will likely move up this list in the not-too-distant future.
Getting an Amazon package delivered to your door requires the coordination of multiple real estate and infrastructure elements to achieve the one or two-day shipping to which consumers are accustomed. The logistical process goes beyond the factories that manufacture products or the warehouses utilized for storage and distribution. Ports, rail, highways, planes, and levees all must work harmoniously to keep supply chains running efficiently. Furthermore, these logistics networks are not immune to risk. Just this year we have seen a computer chip shortage affect everything from manufacturing technology to the technology products themselves, a winter storm in Texas neutralize a power grid, and a cyberattack on the Colonial Pipeline obstruct an entire region’s gasoline stock. All of the components, risks, and interconnectivity of today’s supply chain tie back to logistics real estate, and a quick look at both the demand and supply-side can help us interpret the future of the sector.
On the demand side, it is clear that consumption-oriented uses of logistics real estate are rapidly increasing, while manufacturing and trade uses decline. This has been undoubtedly accelerated by changing consumer spending behavior created by the COVID-19 pandemic. In fact, a logistics report by Prologis found that global online retail sales increased 390 basis points in 2020, which is equal to five years of normal, expected e-commerce adoption. The demand for logistics space shows no signs of stopping. To survive, brick-and-mortar retailers will need to meet these consumer tendencies with an online presence, and thus an ability to fulfill online orders. To put this demand in concrete terms, e-commerce fulfillment requires three times the amount of logistics space than brick-and-mortar fulfillment. The extra space is explained by factors like deeper and larger inventory requirements for when that online discount is just too good to pass up, sparking a surge in demand in a short and volatile period of time.
What does this mean for the supply of logistics real estate? Prologis says developers of new supply will continue to play catch up for the foreseeable future. Land is becoming scarcer in urban areas that need to be served, meaning that new supply will have to be placed farther away from city centers. What’s more, buildings need to be larger and more technologically advanced, which drives up construction costs. Building material costs are also rising, adding an even greater economic hurdle for supply. Even when the perfect logistics site is up and running, the challenges continue. Maintaining the workforce and skill necessary to meet e-fulfillment demand is difficult when three times the amount of labor is required compared to conventional warehouse work, according to Prologis. The equilibrium of logistics supply and demand is off, and there is intense work ahead for a return to harmony.
Though this trend may sound like a specific real estate problem, the ripple effect shows evidence to the contrary. Big box retail sites, once underperforming as large department stores, are now becoming last-mile delivery staging centers. Restaurants, forced to survive a global pandemic through digital ordering and delivery adoption, are now dealing with logistical challenges of their own and rethinking traditional site selection. How the future of office work shakes out will dictate logistic facility placement and workforce sourcing. With so much at stake, understanding both the demand and supply side of logistics informs how we deal with the countless risks, but also how we take advantage of the countless benefits that e-commerce and seamless supply chains bring to humanity.