Logistics is changing beyond all previous recognition. Online shopping – with its ever-dwindling patience for lengthy delivery times – really has turned the ugly duckling into the swan.
The retail sector once lorded over logistics, but industrial now attracts a greater share of global investment than retail does and continues to trend upward. As the performance of the sector has improved, so has the perception of it. Logistics is not being overlooked anymore.
The role of e-commerce cannot be overstated, but other trends are just as important to keep on top of, not least the rise of Asia as an attractive logistics market. Countries such as China provide obvious opportunities, but India is investing heavily in infrastructure to provide logistics with a platform to prosper.
Location matters. There is a fine balancing act between proximity to customers and rent levels, although consumers’ expectations of rapid delivery increasingly push that balance in favor of proximity. Finding suitable sites in or around the most densely populated urban areas is not easy but should be worth it.
It is also worth investing in technology to keep properties at the cutting edge. There is an increased concern around obsolescence, so if operators want to continue delivering the goods to investors, they will have to deliver the goods to customers in a rapidly changing market. Here are five trends underlining logistics’ transformation.
1 E-commerce gives logistics a leg up
The sector is being propelled into the limelight by the inexorable rise of online shopping. It is e-commerce demand that is most responsible for the inversely shifting fortunes of retail and industrial.
This has not gone unnoticed in the market. “Because of the e-commerce story [investors] see logistics as probably the best real estate asset class right now,” says Panattoni Europe CEO Robert Dobrzycki.
The increased logistics demand comes at the expense of retail. Real Capital Analytics figures show retail accounting for approximately 25 percent of global investment a decade ago, when industrial accounted for around 10 percent. Now, industrial has pushed ahead of retail, the former climbing to 16 percent and the latter dropping to 13 percent.
“Many retail shops may be shutting down or downsizing their physical stores … but warehousing fulfillment centers are seeing respectable growth in demand,” says Chua Tiow Chye, deputy group CEO of Mapletree Investments.
Dobrzycki is so confident that e-commerce growth will continue to lead to increased consumption that he argues now is the time to expand into new locations, regardless of how late in the real estate cycle we are.
2 Asia is on the rise
One target for that expansion is Asia. Stuart Gibson, co-founder at ESR, sees “a huge wall of capital” looking to get into Asian logistics. “There is an increasingly strong interest from Canadian, European and Singaporean investors in logistics property in the region,” he says.
Japan, China and South Korea are ESR’s core markets, but the company is also very excited about the potential for India. Mapletree’s Chua, too, sees India – with its population of 1.37 billion and rapidly expanding middle class – as a prime location to expand into, albeit one that is tough to make inroads into.
“All the factors which drive logistics demand are prevalent in India – favorable demographics, rapidly developing e-commerce and organized retail channels,” says Craig Duffy, head of fund management at GLP. Government policy has also been a key enabler for the sector, with the government pledging to invest $1.4 trillion in new infrastructure over the next five years.
The challenge in India is land supply, although the government is making that easier, too. “The largest component of a project is land and securing it can take up to a year. Moreover, you can add another 12-30 months for a project delivery depending on the size of the warehouse and the approvals required,” says Rajesh Jaggi, managing partner at Everstone.
3 The competition for prime locations is fierce
Supply is not just an issue in India, however. The demand for last-mile logistics centers, as consumers expect ever faster delivery, is astronomical.
“Investor appetite for last mile is unquestionably the most intense expression of appetite for any sub-class within the logistics sector,” says Jack Cox, head of EMEA industrial and logistics capital markets at CBRE. “It is the white heat of the flame and there are good reasons for that.”
Logistics assets in and around major cities outperform in rental growth and total return, but land supply is a major obstacle, with suitable sites scarce and expensive. Densely populated cities also make for slow journey times.
While expensive rents are a concern, rent is typically a far smaller cost than fuel for logistics operators. In fact, transport can account for half of all logistics costs. With that in mind, accepting higher rents for locations that will provide transport savings is a sensible strategy.
Analysis by DWS Group and location and customer analytics specialist CACI shows how investors can have the best of both worlds – positioning to take advantage of high spend potential catchment areas while also avoiding the priciest rent locations.
“If you can get a warehouse in a location where you are making big savings on transport, you can afford to pay a much higher rent. That is important because it means that the values for logistics use will compete with other uses in those locations,” says Marcus de Minckwitz, director at Savills.
4 You’re going to need a bigger, greener shed
“The trend in the market is for super-large, super-complicated developments,” says LCP co-founder Kristof Verstraeten. “While we are probably doing a number of projects that are in line with our business plan, they have turned out even bigger than we expected.”
It is not all about size. A raft of advanced technological and environmental features, which were not deemed necessary a few years ago, are increasingly being incorporated. That makes developments now far more costly to develop, although energy efficiency will lead to cheaper operating costs over the longer term.
Global luxury brand group Kering’s decision to take a 15-year lease on a 1.7 million-square-foot distribution hub in Italy marked one of last year’s largest logistics pre-lettings. The two-building campus is due to be completed early this year and is noteworthy not just for its size, but also for its environmental credentials.
The buildings will be the first LEED platinum-certified logistics buildings in the country – and possibly on the continent, according to Verstraeten. The buildings will be heated and cooled via heat pumps using geothermal wells and the entire surface of the roof will be used for solar paneling, so it can supply electricity to other local sites. Customers now expect far more than just four walls and a roof.
5 The sector continues to reach new highs
Expectations are high for deal volumes, too, which have set new records. After a mammoth year in 2018, activity for the first three quarters of 2019 matched the corresponding months of the year before. While Q4 figures have not been finalized, the sum of what has been recorded as closed plus all projects currently under contract would push activity for 2019 ahead of the pace set in 2018, notes Real Capital Analytics senior vice-president Jim Costello.
Blackstone was a major deal player once again. A pair of Blackstone entities bought portfolios of assets from GLP for a total price of $18.7 billion. “These two deals may represent somewhere between 9 and 13 percent of global industrial investment activity for 2019 when all the figures for the year are finalized,” says Costello.