When it comes to significant investor appetite for industrial and logistics assets, there is no let-up in sight. Over a third of the investors we spoke to in May had an explicit desire to gain further exposure to this asset class.
Structural changes within the sector appear to be causing an increase in demand, despite yields on industrial assets being at an all-time low relative to historic levels. Of particular note is the growth of e-commerce, which has accelerated due to the pandemic. According to Prologis, for every percentage shift in the share of consumption from ‘brick and mortar’ to online sales, the amount of logistics space required increases by 46 million square feet.
Unsurprisingly, retailers have adapted to the changing marketplace by optimizing their supply chains. E-commerce supply chains require about three times more space than conventional sales. As further consumption moves online, retailers will need increased inventory in industrial warehouses rather than on the shop floor which further exacerbates the demand for space.
Supply of logistics assets remains limited due to low vacancy rates and restrictions on the amount of land zoned for logistics in and around urban hubs. As industrial demand has outpaced economic performance in this cycle, it is unsurprising that investors anticipate continued rental growth.
In order to maximize investment returns, it is necessary to understand both the supply and demand dynamics and also the way in which such dynamics benefit different types of industrial assets. The drivers impacting fulfillment and distribution assets are different to those of delivery stations. Demographics, online penetration rates, consumption patterns, changes to the manufacturing base and global trade are all factors that are likely to determine which assets will perform best.
E-commerce is unlikely to have a uniform impact, benefiting some industrial assets while rendering others obsolete. It is therefore essential that, given the significant yield compression to date, institutions carefully consider which assets are most likely to benefit from the favorable ongoing structural changes within the sector.