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New Prologis report addresses pandemic-driven permanent shifts for logistics real estate


While it stands to reason that the COVID-19 pandemic has had a major impact on society and business operations, among other myriad facets of everyday life, a report recently issued by San Francisco-based real estate investment trust company Prologis took a deep dive into how the re-opening of the economy will affect the logistics real estate market.

The report, entitled, “Forever Altered: The Future of Logistics Real Estate Demand,” points to various trends and themes related to how the pandemic “has forever altered the logistics real estate landscape,” with supply chain decisions having become more holistic, more data-driven, and more urgent than at any point in the past, coupled with how urbanization, digitization, and demographics have changed the ways in which people live, work, and shop.

In the report, Prologis outlined different factors impacting logistics real estate and demand, including:

  • the long-term structural growth of real estate has risen, with consumption-oriented uses up as a share of logistics demand and a decrease in production- and trade-oriented uses;
  • technology and demographics transforming retail, as consumer expectations have seen a permanent shift, with Prologis estimating that global e-commerce penetration will see steady gains, of 150 basis points, per year over the next five years, and physical retail further requiring rapid replenishment operations to compete;
  • logistics best practices are going global, with supply chain resilience tested as companies expand globally, leading to the need for modern stock and decentralized networks, which, coupled with a rising consumer class, is expected to lead to the need for three-to-four billion square feet, or more, or modern logistics stock over the next cycle (Prologis based the length of this cycle on a model from 2021-2030, using an Oxford Economics forecast for household and income growth);
  • location matters more than ever for logistics real estate customers, as supply chains are a key source of competitive advantage and will continue to drive financial performance; and  
  • price elasticity for demand has increased, as network planning decisions can yield revenue generation and cost control benefits that substantially outweigh real estate expenses, which represent just 5% of overall supply chain costs

In an interview, Melinda McLaughlin, Prologis’ head of global research, explained that the COVID-19 pandemic largely accelerated supply chain trends that were already occurring and that will continue in the future.

As an example, she pointed to how e-commerce was growing due to its convenience and choice benefits, and the pandemic incentivized both consumers and companies to overcome hurdles to adoption, such as setting up accounts and building out direct-to-home distribution capabilities.

When asked if there are concerns about how in a post-pandemic world, with more people vaccinated, the impact of that could lessen demand for the type of e-commerce activity and warehouse and distribution center demand that has been intact over the last year, McLaughlin’s reply was two-fold.

“As vaccinations increase, we expect the e-commerce share of retail sales to temporarily fall as people enjoy the novelty of in-store shopping, travel, entertainment, and services,” she noted. “However, we expect strong cyclical growth will boost consumer spending overall and will sustain healthy e-commerce purchasing, thereby supporting continued warehouse and distribution demand. In the longer-term, consumer behaviors are sticky, investment in e-fulfillment capabilities will attract future spending, and fewer in-store shopping options will reduce competition. We predict the proportion of goods sold online will continue to increase post-pandemic by about 150 bps per year through 2025, and many forward-thinking users of logistics space have multi-year network build-outs planned to deliver these desired capabilities to consumers.”

With the report observing that price elasticity has decreased and real estate expenses have typically accounted for 5% of supply chain cost, McLaughlin said that as a result of these types of megatrends, the role of logistics real estate in revenue generation has increased and real estate decisions are being considered more holistically.  

“A decentralized network close to end consumers can generate sales through higher service levels and minimize transportation costs—both of which produce benefits that substantially outweigh the expense of rent,” she said. “Historical data is scarce, but rent has remained stable at about 5% of overall supply chain costs for several years in spite of strong rent growth.”


Article Topics

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Logistics
3PL
E-commerce
Transportation
Warehouse
Warehouse/DC
3PL
COVID-19
E-commerce
Logistics
Logistics Real Estate
Logistics Trends
Pandemic
Prologis
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About the Author

Jeff Berman's avatar
Jeff Berman
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review and is a contributor to Robotics 24/7. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis.
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