Most of the time we talk about how to negotiate better leases on this podcast. But today we’re going to talk about the Supply Chain – how its reliability became invaluable during Covid-19 and how its weaknesses showed up in a recent winter storm in Texas. When you could no longer go to Wal-Mart, my buddy Jeff Bezos would bring it to my doorstep. Well now, that’s true for the first case of Covid-19, but not so during the winter storm.
I read an interesting report from Prologis today about logistics real estate demand and what they see in the future. Prologis is a large owner of industrial and logistics real estate. They say that decisions surrounding supply chains are becoming more holistic and data-driven than ever before and that we’ll see huge demand for these properties in the future. And they are absolutely right. We’re seeing the impact of this throughout the DFW area with giant warehouses popping up from Alliance Airport in the far northwest to Waxahachie in the south. I did a quick search in CoStar for available warehouses with 500,000 square feet or more and there were 16 properties that could accommodate that, already on the ground. But here’s the kicker, there were another 12 properties under construction and another 42 somewhere in the planning process. There is clearly incredible demand for this type of property.
Prologis mentioned 5 forces that will be shaping logistics real estate in the future. Here they are:
- The long-term structural growth rate of logistics real estate has risen. Production and trade-oriented uses have decreased while consumption-oriented uses have increased. Boy, are we seeing that around here! Industrial is the one sector of CRE that has been positively affected by Covid-19. Consumption is definitely a primary driver here. Retail sales is highly correlated to the need for logistics space and is growing faster than historical drivers like manufacturing and trade. Another factor is that e-commerce is more space intensive than those traditional uses. A few reasons:
- All product inventory is stored in the warehouses for quicker delivery;
- Online retailing offers lots more options;
- Volatility in sales patterns requires deeper inventory levels;
- Parcel shipping versus pallet shipping requires more space;
- Many e-commerce fulfillment places offer extra goodies like assembly and reverse logistics;
- Forecasts say that 125 million square feet of logistical space or more will be needed per year through 2025 just in the United States and Europe.
- Technology and demographics are transforming retail. Prologis actually thinks there will be a bit of a brick-and-mortar retail bounce once the pandemic is under control. But they also forecast that e-commerce will drive demand for warehouses. Consider consumers’ insatiable need for goods:
- Demographics trends – over the last decade, over 2 billion people have gained access to the internet. And those customers, like you and me, want convenience, choice, reliability and immediacy;
- Rapid pace of technological change will allow for better management of the supply chain;
- Covid-19, which drove 5 years’ worth of growth in e-commerce sales in a single year. Example – Prologis says that “e-commerce as a proportion of retail goods sold globally grew to nearly 20% in 2020 from about 4% in 2011”;
- Consumer habits are sticky. Once a barrier is lowered, ease of use will overcome old buying habits and keep them buying online;
- Innovations and investments made to the supply chain during the pandemic or in its wake will increase the competitiveness of e-commerce;
- Brick and mortar stores have closed in record numbers and more will be closed or converted to other uses.
- Logistics best practices are going global. As companies grow globally so does the need for good logistics space. There are rising consumer classes throughout the world which create further demand because Prologis says that an additional 35 square feet of logistics space is required per consumer household brought into the consumer class. If that ratio were to rise by only 5-15 square feet by 2030, it would drive demand for an additional 3-4 billion square feet. How is all this going to affect our old standard just-in-time model? Good question. The supply chain is extremely complex and truly global which was exposed during Covid-19 and the recent Texas winter storm. Prologis points to a few issues that need to be addressed:
- Minimal on-hand inventory;
- Single source of original (think facemasks), and;
- Long lead times and trade bottlenecks.
- Location matters more than ever for logistics real estate customers. So it’s no longer just-in-time, but just-in-case. This may create some demand for bringing some manufacturing back to the Untied States or to close low-cost manufacturing options like Mexico. This could increase inventory levels by 5-10% or more and create a need for another 57-114 million square feet of space.
- The price elasticity of demand has decreased. Price elasticity is basically price sensitivity. If price elasticity falls, the less a buyer of that product is likely to reduce the quantity demanded due to a price increase. Price goes up – I want it anyway (think chocolate). Real estate is just one component of the overall supply chain and accounts for only about 5% of the overall cost. Since real estate costs don’t represent a large portion of total cost, changes in rental rates don’t scare them off and they’ll pay more. More rent means landlords can pay more to buy the building. Transportation costs account for about 50% of supply chain costs so proximity to the end user can make a big difference. So with improved technology, planning and the right location, rent sensitivity is far less of an issue.
It seems the industrial surge will continue to grow in the near and distant future. Is there any reason you would see for it slowing down? No, not really. The ease and use of ordering online are basically changing our world as we know it. The world’s urban population doubled over the past 30 years and is forecast to double again during the next 30.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.