Consumers won’t turn back from e-commerce now – so what do institutional investors need to know about the logistics property market?
The influence of e-commerce on the daily life of many Americans became clear to me when my 92-year-old mother was able to identify what grocery items arrived at her home by the logo on the shipping box. Right now, I am doing the ordering, or ‘clicks’ as she calls it, for her, but if voice recognition technologies continue to improve, maybe that will change. The accelerating trend of e-commerce has made me wonder if the widely publicised e-commerce demands for industrial space will continue post-pandemic. What should the well-informed investor in US logistics properties be considering?
US industrial investment activity is well below 2019 levels, yet prices have posted 7% growth from a year earlier, according to Real Capital Analytics. While in the second quarter US industrial leasing initially slowed, e-commerce has been the primary demand driver to increase leasing volumes as the year has progressed. Amazon has reported its goal is to expand US warehouse square footage in 2020 by 50%, and year-to-date over half of all industrial leasing activity resulted from e-commerce and third-party logistics firms.
The key remains careful evaluation of sub-markets and an understanding of local supply/demand projections
For every $1bn in US e-commerce sales, Prologis estimates that 1.2 million sq. ft of industrial space is required. This is three times more than the traditional throughput required by distribution operation. Hence, e-commerce activity is having an outsized impact on US industrial leasing demand, rental growth and property values. What do we need to know about US e-commerce sales? In 2019, e-commerce sales were approximately $600bn in the US, and in 2020 it is estimated that this will rise to slightly over $700bn. Post-pandemic there is likely to be a reduction in the pace of e-commerce sales growth, but in the US e-commerce has now been accepted and will stay with us out of habit and familiarity, leading to continued positive impact on the industrial sector. CBRE’s current baseline estimates are that in ten years’ time e-commerce will be responsible for 30% of all US non-auto retail sales, compared with today’s 18% share.
A quick look at near-term supply forecasts could raise investor concerns, since the approximately 300 million sq. ft of new industrial product expected in each of the next two years is twice the historical ten-year average annual supply. Experts believe, however, that anticipated demand will exceed 300 million sq. ft in each of those two years. In the longer term, supply and demand projections appear in line, and of course supply can be somewhat managed, given the relatively short industrial construction timeframe, and the watchful eye of the lending community.
Industrial property is hot, so an institutional investor must carefully consider the opportunity and risks it presents today. Barings has experienced success in industrial investment in markets with very strong demand drivers such as Dallas, Atlanta, New Jersey, Boston and southern California, focused on product that meets the needs of e-commerce tenancies. In evaluating industrial investments, not only do clear heights, bay sizes, and LED lighting matter, but also the availability of sufficient parking areas to accommodate employees’ cars, delivery vehicles and tractor/trailer parking, as well as sufficient and inexpensive power to support the current and anticipated use of greater automation within the facility. In addition, e-commerce tenants are working hard to attract employees, making break rooms, tenant amenities and office space more attractive, creative – and expensive.
The key to successful investment in US industrial properties in the near term remains careful evaluation of markets and sub-markets and an understanding of local supply/demand projections, along with attention to the specific product under consideration. E-commerce is a positive influence on industrial demand, rents and, ultimately, investment returns, but local knowledge and understanding are required to be certain that the investment under consideration will meet e-commerce requirements over the long term.
