This article is sponsored by Logistics Property Company
The partnership between Logistics Property Company and MIRA Real Estate, part of Macquarie Group, develops and manages state-of-the-art logistics properties in key North American markets. Jim Martell, LPC’s chief executive, and Eric Wurtzebach, MIRA Real Estate’s head of the Americas and senior managing director, explain the potential they see in logistics, its long-term fundamentals beyond the pandemic, and their ESG and equity, diversity and inclusion (EDI) push.
What has driven growth in logistics and how is the pandemic impacting the sector?
Jim Martell: The logistics business continues to grow organically as GDP grows. With the strength of our GDP, consumer demand increases. That, in turn, continues to raise the need for industrial real estate across the US and the globe.
Then there is the disruption related to the decline in bricks-and-mortar retail and industrial caused by the consumer’s growing comfort with and desire to switch to the same-day delivery associated with e-commerce. As this transition between retail and industrial was taking place, the pandemic hit, causing e-commerce sales to advance by 10 years.
Consumers who were uncomfortable with e-commerce were forced to shop online and have found it to be reliable and consistent. As they are now comfortable with e-commerce, we don’t see online sales ever going back to pre-pandemic levels, because of the convenience of the e-commerce logistics network.
Eric Wurtzebach: The industrial space has remained resilient during the pandemic, largely driven by those fundamentals. What is most telling is that values are now higher than pre-pandemic.
So, not only has the pandemic accelerated the trend from bricks-and-mortar retail sales to e-commerce retail sales – which is driving demand and driving rental increases – but capital has followed, and the asset class has been resilient during covid as a result.
Are you concerned about asset prices being too high?
JM: We are seeing a tremendous escalation in pricing, first of all, in land. Because of the demand to build logistics real estate, land pricing has increased significantly. Demand for last-mile distribution locations, which are generally very close to the inner cities, has seen explosive price increases.
In some New York boroughs and some Chicago neighborhoods, land prices are now well over $100 per square foot. We have never experienced that level of escalation in land prices previously. Demand for suburban land is lower – but prices are still escalating across the country – with some of it running between $20 to $60 a square foot.
Our biggest challenge continues to be finding attractive land sites in major population centers as demand is significant.
EW: Strong market rental growth combined with low interest rates and high overall investor demand have led to high core industrial pricing in all markets. Pricing should continue to be supported by low interest rates over the long term. More significant than low interest rates are the significant structural tailwinds behind the sector.
These tailwinds include the continued shift of retail sales from bricks-and-mortar to e-commerce, where every dollar of retail sales that moves from bricks-and-mortar to e-commerce requires three times the logistics space.
Importantly, these long-term structural tailwinds that have accelerated during covid-19 are not expected to slow down over the medium to long-term. As a result, industrial asset prices should remain high. Obviously, pricing is relative market by market. We partnered with LPC, seeking to develop and deliver core assets below replacement cost.
What should you look for in logistics?
JM: The primary focus for us is to create a sustainable stream of cashflow on our investments. Long-term, sustainable cashflow is really the key component to our strategy. We build long-term consistency in the cashflow because our leases are longer, typically from 10 to 15 years.
We are finding exceptional locations and developing buildings that we believe will stand the test of time and be able to consistently generate cashflow with the rent growth that we are building into our leases.
EW: We are looking for state-of-the art assets and, importantly, we are more environmentally conscious. A big piece of what institutional investors like Macquarie and the marketplace want is a focus on ESG, sustainability and good social impact.
Do you feel a growing number of logistics players are taking ESG seriously?
EW: I cannot speak for other groups, but I can speak for Macquarie and LPC’s focus on sustainability and ESG in general. Macquarie has committed to net-zero emissions by 2040, so Macquarie is a clear leader, and ESG is important to us, to our partners and to LPC.
Generally speaking, US real estate developers are far behind on the ESG front. And while institutional investors are certainly focused on this issue, it is not the investors who are driving us to take action. For both Macquarie and LPC, it is our responsibility and in our interest to do it – it just so happens investors also want to see the same thing.
JM: We are taking ESG very seriously and we are also very focused on EDI in our workforce, not only at the employee level, but also with our vendors and our outreach program. Our team is making sure we are incorporating women- and minority-owned organizations as part of our teams in the field. That is a key aspect of our overall ESG and EDI programs.
We are also very proud of the fact that approximately 50 percent of the employees at LPC are women or from a diverse background. The benefits of diversity start with a variety of perspectives, so including people who come from different backgrounds, and adding that input into our thinking, is critical for us.
Does the logistics industry have a lack of diversity today?
JM: I would say that from the construction/development part of the business, there continues to be a lack of diversity at the highest levels and that is where we are focused, to bring more women- and minority-owned businesses to the forefront and promote using these companies.
EW: There is a clear lack of diversity in the industry and the institutional industrial asset class. Including a broad number of perspectives is a big focus of ours – both internally, within our overall organization, the real estate group, and also externally, with our partners. It is not something we are going to be able to solve overnight, but it is something that we are committed to and dedicated to helping improve over time.
Case study: 3711 South Ashland Avenue
The challenge: How to avoid graffiti on a 266-by-38-foot wall on a state-of-the-art logistics facility in downtown Chicago.
The solution: LPC commissioned a custom mural by a female multi-disciplinary Detroit-based artist, who collaborated with several local Chicago and Midwest artists on the project, and also supported a local non-profit, Chicago Public Art Group (CPAG), as an extension of the strategic community engagement initiative.
The result: An aesthetically pleasing, respected public artwork that enhances the appeal of 3711 South Ashland Avenue, deters graffiti taggers and adds value to the community and LPC’s future tenants. The installation took place in August 2020.
You are specialized in ‘state-of-the-art’ logistics: what makes this type of asset ‘state-of-the-art?’
The floor design, due to more sophisticated material handling robotics, is becoming increasingly important. Power requirements driven by material handling technology staging and maneuverability into and around the site all add to operational cost efficiencies. Then there is the technology that dramatically improves the building; for instance, technology that makes the concrete stronger or the floors flatter.
Location will always matter, but a ‘state-of-the-art’ building must also have access to labor, and it must provide a transportation solution. Transportation is probably 60-65 cents of every logistics dollar.
When you offer a transportation solution to a tenant, you can reduce their transportation costs much more than you can reduce their overall occupancy cost. So, labor and transportation are top of the list when looking at making a facility for years to come.