Pi Labs on how dynamic use of space is key to logistics

As e-commerce continues to grow, bold and flexible use of logistics property should become a major area of focus for investors, says Dominic Wilson, managing general partner of Pi Labs

As an asset class in real estate, logistics has become a top performer, breaking recent records in 2018. In the UK, a recent report by Savills confirmed that nationwide take-up of logistics assets in 2018 had reached 34.1 million square feet. This represented a 32 percent increase on 2017 and a 14.1 million square feet increase on the long-term average.

Dominic Wilson

Vacancy rates stand at approximately 5 percent. No wonder then that 77 percent of major real estate investors believe logistics has become the most attractive sector for investment and development. Yet amidst all this laudatory headline performance, an alpha returning investor’s role is to maximize the value of their holdings. So, can capital allocators to this sector perform even better?

The answer is yes. It is tempting with large new entrants to the market, like Wayfair, to focus on yield, income and banking covenant KPIs. But the explosion of the logistics industry – estimated at $4.6 trillion globally – represents an exponential rise in e-commerce, driven by micro-players plugged into huge platforms like Amazon. For asset holders in this sector, focusing purely on the three aforementioned areas risks overlooking the change coming to the industry and the opportunities that come with it.

Nimble approach required

WeWork has blazed a trail for a paradigm shift in how we demand, use and value space. Eschewing traditional long-term, low-quality user experience-focused offices in favor of small, high-quality office space with a focus on maximizing revenue through shorter terms at a higher, albeit riskier, rent. For start-ups – WeWork’s initial target market – flexibility, and the ability to scale up dependent on demand are highly prized features worth a more expensive rent on a per square foot basis. Furthermore, most start-ups cannot afford a long-term lease liability initially. Like start-ups, small micro e-commerce retailers and suppliers value this flexibility, and logistics asset owners need to respond in kind.

Emerging technologies focusing on dynamic utilization of space and pricing for asset owners have the potential to be a revenue maximizer for capital allocators, as well as solving variable and unpredictable inventory needs for tenants. This then is no longer a focus on a shed, but a pallet. Like hotels or airlines break their inventory down into rooms or seats, it is time to break these large warehouses down into individual units by the pallet or consignment, which can be tailored to individual demands or flexed according to seasonal trends. The logistics industry has traditionally been defined by large, slow-moving goliaths with considerable tracts of assets under management or ownership. Companies like Flexe or Stowga, which track demand and provide an interactive marketplace from as small as one pallet provide a nimble technological counterpoint.

There are also technologies that make good bedfellows to this overall theme of dynamism. Innovative products which track and compile data that can be better used for predictive analytics on utilization can then be offered to manage capacity. Pricing algorithms can also be
built, which would result in the optimal pricing being used on short-term space and storage applications. Lastly, and perhaps this is tangential or an extension further down the timeline, logistics assets and owners will become operators of autonomous trucks and will extend the level of service they provide to their tenants to transportation and shipping. In so doing, capital allocators to logistics assets will be embracing the overall trend of real estate moving to a service business, which sits alongside the capital aggregation of the asset approach.