Logistics: Start of the journey

The supply-chain modernization driving occupational and investor demand for logistics real estate still has a long way to go, argues Chris Green, global head of real estate at Macquarie Capital.

Capital advisor and principal investor Macquarie Capital has demonstrated its confidence in the potential of logistics real estate by backing development platforms including LOGOS in Asia-Pacific, Peel Logistics in the UK and Austral in Brazil. Global head of real estate Chris Green tells PERE why investors are showing an increased appetite for the sector and how they can carve out a position in a competitive marketplace.

PERE: Why has logistics real estate taken center-stage for institutional capital in recent years?

Green: modernization is only in the early stages

Chris Green: If you go back 15 years, logistics, or industrial as it was usually called back then, was often characterized by small tenants and small assets. It was not really an institutional asset class. Since then, the nature of the tenants has changed radically with the space now being dominated by global e-commerce companies like Amazon, global logistics operators like DHL, FedEx and Kuehne & Nagel, and increasingly large food retailers with their own supply chains. The assets themselves have become much larger and more infrastructure-like in terms of their importance to the supply chain. Those changes are driving a modernization, which is actually only in the early stages rather than nearing the end. They have also led to an increasing appetite to participate in the asset class among institutional investors. We expect enormous continued growth on the user side and therefore think logistics will remain a very attractive asset class in the future.

The returns available in logistics are also attractive relative to other asset classes. In a development-led sector the opportunity to capture some of the development return is appealing, especially when you consider the very stable long-term return outlook for the asset class. The real estate world has its cycles, but long-term investors like pension funds and sovereign wealth funds are drawn to the sector by the overarching long term structural changes that are driving the need for increased warehouse space. The biggest of those investors are backing logistics on a global basis, but increasingly we are also seeing smaller regional allocations to the asset class from a broader range of pension funds.

PERE: How important is the role of online retail in driving those structural changes?

CG: My favorite statistic about the development of e-commerce and its impact on logistics real estate is that for every dollar of retail sales that goes online there is three times more space required in warehouses to provide the full spectrum of services that go with that business – storage, fulfilment and dealing with returns. That means the expected move to online sales has a multiplier effect on the requirement for space.

“The opportunity to capture some of the development return is appealing, especially when you consider the very stable long-term return outlook for the asset class”
Chris Green

Alongside that we are seeing an increased emphasis on the quality of the delivery service provided by those e-commerce retailers. For example, in Manhattan, Amazon has a two-hour delivery window for its Amazon Prime customers. That leads to a further modernization and adjustment of the supply chain and drives the need for more warehouse facilities close to population centres so that retailers can meet their customers’ expectations on delivery times. Like other asset classes the performance of logistics is linked to overall GDP, but given the transition from brick and mortar retail to e-commerce, then even if GDP growth falls short of expectations – which would impact the office sector, for example – by investing in logistics you have that built-in buffer of the underlying switch that is going on in the way consumers are buying goods.

Furthermore, the positives that relate to long-term demand in logistics correlate to negative factors for traditional retail. Historically, retail has been a very big component of institutional investors’ overall real estate portfolios. Some of the concern around retail as an asset class may not eventuate, but nonetheless it does face a lot of challenges and that has led to institutional investors being a lot more cautious toward that asset class, so the question of where they invest that money instead is another thing driving them toward logistics.

Another factor that influences institutional investors is their desire to have exposure to the biggest cities. Continued urbanization is a demographic trend the world over. While it is most obvious in China, even in the US the bigger cities are outpacing the growth of the smaller ones. Logistics and multifamily residential are ways to play that theme. The warehouses themselves may not be located in the city, but it is the growth of population within those cities that the warehouses are supporting.

PERE: What is the key to devising a successful strategy for investing in the sector?

CG: When investing in logistics it is crucial for investors to make sure they have the right partner. A lot of logistics investment has been into development or newly-developed properties and therefore having a partner that is vertically integrated and can do everything from development through leasing to property management is critical, because they can maintain close relationships with big users. All sheds are not created equal and that really comes down to location and specification.

If you are not partnered with an operator that understands what logistics users are looking for, and which has real estate and development land in the right locations, you can end up with a warehouse that is not in the right spot. That can make an enormous difference in terms of the ability to attract tenants. Meanwhile, the functional requirements for the big users of warehouses have evolved in terms of elements like the level of clear height, cross-docking, truck turning and parking, and there is a trend towards super high-bay warehouses and automation. Those factors make the technical specification of the building really matter as well.

Setting up the right investment structure can be challenging, though, because a lot of the big global logistics platforms have already partnered up with investors. Core investors have been much more eager to invest in completed development projects rather than take leasing risk, but many have done that by forming joint ventures with developers to acquire assets when they are completed and leased. We have done that ourselves – partnering with vertically integrated logistics real estate groups around the world and co-investing in their pipeline. Other groups like Goodman, Prologis and GLP have a similar model where investors come in and get an enhanced return by participating in the development phase, but once they have created what is a very valuable asset they then hold that long-term.

PERE: Are there any reasons why investors should be cautious about the asset class?

CG: Investors do need to be cognizant of the level of new supply. In certain markets there are elevated levels of new development coming online. They also need to be careful when examining the technical specifications and location of assets because those factors really impact value and levels of return. That said, I feel there is much more discipline on the development side than there was before the financial crisis. There is certainly more development going on now than there was coming out of the crisis during 2010-12, but because the size of a typical project has become much larger there are a smaller number of big specialist developers that can deliver them. For that reason, there is a lot more rigor going into understanding the user side and moderating the supply of real estate to fit the tenant demand.

This article is sponsored by Macquarie: It appeared in the Investing in Logistics supplement with the February 2018 issue of PERE