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 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.”