The Drivers Behind Logistics Warehousing's Bright Future

Multiple important economic trends and strong forecasts for the logistics warehousing industry make it a commercial real estate investment sector that should perform solidly today and in the coming years.

Net effective rents, absorption, consumption and the sector’s position as a hedge against inflation are making it attractive. Even the supply chain management breakdown is a potential boon to these investors.

Perhaps no analyst firm is more bullish about logistics than Noyack Capital Partners, which recently issued a report detailing how and why demand for logistics infrastructure in mobility hubs (structured parking), cold storage warehousing, dry warehousing, and healthcare creates asymmetric risk-reward potential. 

Noyack assesses current market conditions to identify attractive, yield-generating assets in the near term. 

“Over the long run, we believe Noyack is uniquely positioned to tap into unrealized revenue opportunities by bringing planned innovations to the logistics supply chain as the rapid adoption of ecommerce accelerates the digitization of the American economy,” said C.J. Follini, Principal, Noyack Capital Partners.

Logistics Makes Supply Chain Work

The disruptions posed by the pandemic in the last year have illustrated the centrality of logistics infrastructure. Now more than every, consumers are aware of how essential warehouses, trucking fleets, and container ships, for example, are to everyday life ‐‐ and that makes logistics real estate an attractive business

San Francisco‐based REIT Prologis, Inc. issued a report earlier this year on the trends shaping logistics real estate demand and noted, ‘Demographic trends, the rapid pace of technological change and COVID‐19 have transformed how we live and our notion of what is possible, driving an evolution in retail and boosting logistics demand.’

Follini agrees, noting that, “The current disruptions throughout global supply chains are furthering the ‘pull-forward’ of the industrial cycle in that procurement departments and buyers are doubling their product and supply purchases and storing them in domestic warehouses just to meet the holiday season’s anticipated demand.

“Pandemic-related growth of grocery e-commerce and same-day delivery alone compressed five years of the evolution of consumer behavior change into a single year. Not surprisingly, the controlled-climate area of the supply chain lacks sufficient infrastructure, so it is an area we will pay close attention to moving forward.”

His point is supported by Prologis’ report on logistics real estate demand, which explains further why online order fulfillment requires more than 3x the logistics space of brick‐and‐mortar. The report cites the following as reasons for this increase in space.

• All inventory is stored within a warehouse.
• Online storefronts offer greater product variety due to unlimited digital “shelf space.”
• Higher volatility in sales patterns necessitates deeper inventory levels.
• Parcel shipping requires more space than shipping pallets.
• Many e-fulfillment operations include value-add activities such as assembly and reverse logistics.

Taken together, this intensity of use generates substantial incremental demand as a greater proportion of retail goods are sold online.

Prologis’ report indicates that consumer expectations have increased in a permanent way, favoring convenience, choice, reliability and immediacy. ‘Naturally, the combination of new digital options and a desire for convenience have propelled the adoption of e‐commerce,’ it read. ‘E‐commerce as a proportion of retail goods sold globally grew to nearly 20% in 2020 from about 4% in 2011.

Melinda McLaughlin, head of global research with Prologis says, “The lesson learned from the pandemic is that the just-in-time supply-chain model isn’t really built to handle these kinds of large-scale disruptions.” 

As a result, merchandisers are looking to gain more control over their supply chains by leasing networks of smaller fulfillment centers in urban areas, to larger regional warehouses, NOYACK wrote.

Logistics Real Estate Absorption Rose 96%

According to Cushman & Wakefield, dry warehouse absorption rose 96% in Q2 from a year ago, while new supply simultaneously fell 14%.

“This market dynamic has significantly increased rents and valuations of all logistics assets as demand has outpaced supply by 45% year-to-date,” according to the report. “Demand for the asset class is expected to remain robust as market penetration continues to grow exponentially, but on a much larger base. This has led Global X ETFs to raise its 2030 e-commerce penetration forecast from 22% to 34%.

Noyack cites the Prologis Industrial Business Indicator, Prologis’ quarterly index of customer activity, which rose from the high 50s during Q1 2021 to the low 70s in the second quarter—the highest on record. “The IBI also noted that the savings rate is higher than pre‐ pandemic levels, which could translate to sustained strong consumption for the foreseeable future and support ongoing high supply chain activity. The modality shift from in‐store to online, where now more than 20% of all goods transactions occur, is driving demand, given the 3x higher intensity of use. U.S. net absorption was a record 110 MSF in 2Q’21, according to Prologis.”