FEATURE: The logistics of e-commerce

Last month, Jones Lang LaSalle began marketing the Goodman Logistics Center Oakland, a 374,725-square-foot distribution facility under construction less than one mile from the Oakland International Airport. The property is the first new development in a planned strategy of up to $1.5 billion in US logistics and industrial facilities by Goodman Birtcher, a partnership between Australian property investor Goodman Group and Irvine, California-based Birtcher Development.

March also brought news of Goodman agreeing to buy a 25 percent stake in ATL Logistics Centre Hong Kong for approximately $450 million. At 13 stories and 6 million square feet, the property is the world’s single largest logistics facility and services most of Hong Kong’s container traffic.

These deals by Goodman are two of many recent examples in which private real estate firms are capitalizing on a fast-growing need for new warehouse space. Indeed, all over the globe, the demand for logistics facilities is rising at a rapid pace. 

Greg Goodman, chief executive officer of Goodman Group, tells PERE that the industrial real estate segment is “probably one of the best investment classes globally,” adding that “industrial is very attractive to investors.”

One of the reasons for this increased demand? The continually accelerating growth of e-commerce businesses. 

Though there are other contributors to the recovery of the industrial real estate market, such as increased consumption, supply chain reconfiguration and the overall recovery of global trade, the growth in e-commerce is one of the major factors driving the increasing demand for this property type. In turn, the increasing need for warehouse space is causing a decline in the need for traditional retail space, although that property type is far from dying out altogether. 

The e-commerce boom

Online retailing giants like Amazon and eBay need more fulfillment centers and warehouse space to service their rapidly expanding customer bases. To these online retailers, it doesn’t matter whether they get these space needs met by a private equity firm, a REIT or a local developer, so it’s crucial that private real estate firms take advantage of the trend.

“E-commerce is here to stay,” says Frank Cohen, senior managing director at The Blackstone Group. “Private equity firms need to be aware of this and find interesting investment opportunities.”

The rise of e-commerce is nothing new. Over the past 10 years, e-commerce has been growing approximately 10 percent to 15 percent on a year-over-year basis. Citing statistics from Forrester Research, a recent report from Internet Retailer magazine projects that e-commerce spending in the US will hit approximately $262 billion this year, up 13.4 percent from $231 billion spent in 2012. 

As Internet shopping grows, so grows the need for distribution and fulfillment centers. One third of all demand for big-box warehouse space has been tied to multi-channel retailers, or ‘e-tailers’, that have found online and mobile sales driving the need for fewer brick-and-mortar retail stores and more regional distribution facilities to accommodate next-day delivery.

What is relatively new is that private equity firms are finally taking advantage of the wealth of opportunities in the space. Even a titan like Blackstone is getting in on action, completing its takeover of the CalWest portfolio, a 21 million-square-foot US industrial portfolio previously owned by Walton Street Capital, last year. The New York-based private equity and real estate giant now owns some 83 million square feet of industrial space in the US and 26 million square feet in Europe. Bear in mind, the firm owned no industrial warehouse space prior to 2010. 

Clarion Partners, which has developed 33 million square feet of industrial space since 2002, is another firm clearly primed to take advantage of the e-commerce boom. Last May, the New York-based real estate investment manager teamed up with Dallas-based Hillwood to develop a massive 950,000-square-foot fulfillment center in San Bernardino, California, on behalf of Amazon. Various media outlets have reported that Clarion has since expanded its relationship with the e-tailing giant.

“The boom of e-commerce in many respects is a net gain for the warehouse sector,” says Tim Wang, director and head of investment research at Clarion. 

Bringing value to the table

It’s clear why a private equity real estate firm would want to capitalize on this ever-expanding need for industrial space. The bigger question is what they can bring to the table. In other words, why would the Amazons, 360buys and VIPshops of the world want to partner with the Goodmans, Clarions and Blackstones? 

Simply put: private real estate firms, especially those with a massive national or global footprint, can simplify e-commerce firms’ lives and provide options as to their real estate needs. Indeed, although e-commerce firms require more space these days, they generally don’t want to acquire, develop or hold the warehouse space they need. Therefore, they often turn to experienced real estate firms with the capacity to develop and own the facility and then lease it back to them.

Thorsten Kiel, a fund manager at Henderson Global Investors in charge of the firm’s soon-to-close Henderson German Logistics Fund, says: “E-commerce retailers sometimes are not willing to accept 10-year leases and have weak covenants, so they cannot get a developer to build a new asset for them. Therefore, they tend to rent space, which helps strengthen rents for landlords such as us.”

Ultimately, it makes sense for a global firm like Amazon to turn to a real estate firm with a global or national footprint instead of a local developer. 

“We’ve got a big infrastructure around the world,” says Goodman of his firm. “We’ve got the capital and financing to build three or four buildings at a time for Amazon or Alibaba.com.”

Warehousing in the West

With economic recovery underway and low levels of new supply, industrial fundamentals are positive, particularly in the US. In addition, companies are looking at supply chains and trying to improve them. Since the US in particular is a mature industrial market, changes are being made to the existing supply chain in addition to new construction.

The US isn’t the only country in the Americas to see strong and growing industrial fundamentals. Brazil also is seeing growth in the warehouse sector. Last November, Global Logistic Properties (GLP) expanded its empire beyond Asia for the first time with the $1.45 billion acquisition of a pair of large portfolios in Brazil, thereby becoming the largest logistics real estate investment manager in the country.

Mexico is another country in the Americas that a few private equity firms are bullish on in terms of industrial real estate. In particular, Guy Jaquier, chief executive officer of private capital at Prologis, says Mexico “is becoming an increasingly more desirable location for manufacturing due to higher fuel costs and an increase in labor costs in China, especially in the automotive, aerospace, electronics and large appliance sectors.” The San Francisco-based logistics firm currently is building out a one million-square-foot facility in northern California for Amazon and a 1.1 million-square-foot space in Atlanta for Home Depot on behalf of its HomeDepot.com e-commerce site.

In Western Europe, meanwhile, Forrester Research projects e-commerce spending to reach €128 billion this year, up 14.3 percent from €112 billion in 2012. Although the market in Europe is similar to that of the US and facing some of the same factors driving fundamentals, it is by no means identical to the US. 

First of all, Europe comprises about 4.5 times less Class A industrial space than the US, which suggests considerable room for further growth. Secondly, the recovery in Europe has been lagging the US by several quarters. Not only that, but the European logistical market just isn’t as mature as that of the US. 

Still, Europe is seeing some considerable activity. Goodman, for example, is in the process of developing an 80,000-square-meter facility in France, a 50,000-square-meter property in Germany and another warehouse in Germany that’s about 78,000 square meters – all of behalf of e-tailers.

Ultimately, logistics is becoming an increasingly attractive property type in Europe among institutional investors for many of the same reasons as it is in the US (improved economy and a growing online shopping culture). Indeed, a new survey conducted by CBRE unveiled at the MIPIM property conference last month revealed that investors are warming up to the logistics sector in Europe. The survey noted a marked rise in the popularity of logistics property among investors, with 20 percent selecting the sector as the most attractive for purchases this year compared with 14 percent in 2012. 

In contrast, investors appeared more cautious about retail property this year, with lower proportions of investors selecting shopping centers as the most attractive sector compared with the 2012 survey. “In Europe, e-commerce is a driver as well, but the main differentiator from the US is the region’s new supply chain reconfigurations,” says Jaquier.

Eastern e-tail 

Changing fundamentals also are affecting the warehouse space in Asia, where e-commerce is a big growth area. At GLP, for example, its top tenant in China is Amazon, which represents about 5 percent, or about 300,000 square meters, of the firm’s leasable space in the market, as of December. In addition to Amazon, GLP has a few more e-commerce companies among its top 10 tenants, including 360buy and VIPshop.

Although the amount of logistics space per capita in China is just one-fourteenth of that in the US, e-commerce customers represent a growing proportion of the market. For example, as of the fourth quarter, online retailers represented about 20 percent of GLP’s leased space in China. That is up from 11 percent in 2011 and just 3 percent In October 2010. 

When a tenant thinks about leasing warehouse space, it’s mainly about scale, and that is where some of the industry’s heavyhitters offer the most benefit. For instance, in GLP’s three primary markets – China, Japan and Brazil – it is the market leader in terms of its industrial footprint. In China, the firm is about seven times the size of its next biggest competitor and, in Japan, it’s 40 percent larger than its next largest competitor.

For Prologis, Japan is its most profitable country in the region. Its success in the region, according to 

Jaquier, “is heavily impacted by supply chain reconfiguration. The recent success of our J-REIT shows considerable investor interest for high-quality properties in Japan, and Prologis is committed to further growing our platform there,” he says.

Stayin’ alive (sort of)

When it comes to e-commerce, where logistics space gains, retail space suffers. Indeed, some retailers like Best Buy are finding that their stores are being used more as showrooms; customers come to inspect the merchandise, but they make the actual purchase online. 

“As you can imagine, store-front and showroom retail is being minimized in some cases and in other cases replaced by Internet fulfillment warehouses,” says Ward Fitzgerald, chief executive of Exeter Property Group, which earlier this year bought a 600,000-square-foot distribution warehouse in West Memphis, Tennessee. 

On average, consumers under the age of 25 are shopping almost exclusively online. As they get older and accumulate more income, the population that shops exclusively online via computers, tablets and smartphones is expected to grow even larger. 

In February, AXA Real Estate released a rather dire report on e-commerce’s impact on traditional retail, concluding that a reduction in the financial viability of physical retail units will bring some rental values in the sector down close to zero. That is a pretty sobering assessment.

While it’s true that some retail segments, such as booksellers, electronics retailers and furniture stores, are becoming more vulnerable to e-commerce, things aren’t as dire for the traditional retail sector as many would believe. Some sectors, such as grocery-anchored retail, movie theatres and personal healthcare stores, are still pretty resistant. In addition, retail spaces that are attached to either office space or residential units are projected to remain strong. 

The bottom line is many consumers still prefer shopping for food at the store rather than online. Furthermore, e-commerce simply can’t eliminate the social and communal aspect of shopping that many consumers enjoy. “Because there’s a social aspect of shopping, there’s a lot of retail that I don’t think can be replaced,” notes Cohen. 

Lastly, despite e-commerce being a game-changer, it is unlikely that it will continue to grow at 15 percent per year indefinitely. So, although the retail sector is facing strong headwinds, it is highly unlikely that it will go the way of the dodo.

Getting on board

With e-commerce continuing to grow for the foreseeable future, such retailers increasingly are turning to asset managers with a substantial footprint and expertise in major logistics markets across a country or region. If an e-commerce company wants to set up fulfillment centers in a dozen towns throughout China, for example, it makes far more sense to have one contract with GLP than a dozen contracts with 12 different independent operators.

“E-commerce is a very fluid business where there is no one-size-fits-all approach for everyone,” notes Jaquier. “With our global platform, we have the capability to develop build-to-suit space, small or large, on well-located land in a variety of markets.”

This trend of growing e-commerce companies requiring more logistics space is happening with or without the participation of private equity real estate firms, so it’s up to the industry to decide whether or not to get on this fast-moving train or get left behind at the station. With deals like the Goodman Logistics Center Oakland and the ATL Logistics Centre Hong Kong taking place, however, it looks as though the industry is beginning to climb aboard.