The drivers of the bright future of logistics warehousing

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Multiple significant economic trends and strong forecasts for the logistics warehousing industry make it a commercial real estate investment sector that is expected to perform well today and in the years to come.

The net effective rents, absorption, consumption and the position of the sector as a hedge against inflation make it attractive. Even the breakdown of supply chain management is a potential boon for these investors.

Perhaps no analyst firm is more optimistic when it comes to logistics than Noyack Capital Partners, which recently published a report detailing how and why the demand for logistics infrastructure in mobility hubs (structured parking), warehouses cold stores, dry warehouses and healthcare creates asymmetric risk-reward potential. .

Noyack assesses current market conditions to identify attractive assets that generate short-term returns.

“In the long term, we believe that Noyack is uniquely positioned to exploit unrealized revenue opportunities by bringing planned innovations to the logistics supply chain, as the rapid adoption of e-commerce accelerates the digitization of the US economy. Said CJ Follini, Director of Noyack Capital. The partners.

Logistics make the supply chain work

Trade and commerce are the lifeblood of the global economy, and the supply chain is its circulatory system, according to the report.

Fleets of trucks and container ships, railcars and terminals: Logistics is the often overlooked infrastructure that makes it all possible. Logistics infrastructure (warehouses, distribution facilities, distribution centers) is at the center of this constantly evolving ecosystem. The centrality of logistics in global trade and the underlying trends driving demand and change make logistics real estate an attractive business.

“Demographic trends, the rapid pace of technological change and COVID-19 have transformed the way we live and our notion of what is possible, leading to an evolution of retail and increasing demand for logistics infrastructure,” Noyack continued. . “Same-day delivery and just-in-time distribution requires 3 times the runtime space than brick and mortar retail.

Follini said, “The current disruptions in global supply chains are promoting the ‘pull ahead’ of the industrial cycle as procurement departments and buyers double their purchases of products and supplies and store them in storage. domestic warehouses just to meet the anticipated demand of the holiday season. .

“The growth associated with the e-commerce grocery and same-day delivery pandemic has compressed five years of evolution in consumer behavior change into a single year. Unsurprisingly, the climate-controlled area of ​​the supply chain lacks sufficient infrastructure, so this is an area we will be paying special attention to moving forward. “

After all, fulfilling orders online requires more than 3 times the logistics space of brick and mortar because:

  • All stocks are stored in a warehouse.
  • Online storefronts offer a wider variety of products with unlimited digital “storage”.
  • Higher volatility in sales patterns requires higher inventory levels.
  • Shipping packages requires more space than shipping pallets.
  • Many e-fulfillment operations include value-added activities such as assembly and reverse logistics.

Overall, this intensity of use generates substantial additional demand as a greater proportion of retail products are sold online.

The report says consumer expectations have been steadily increasing, promoting convenience, choice, reliability and immediacy. “Naturally, the combination of new digital options and a desire for convenience has propelled the adoption of e-commerce,” it read. “E-commerce as a proportion of retail products sold globally has grown to almost 20% in 2020 from around 4% in 2011. According to some estimates, the COVID-19 pandemic has accelerated the digital adoption of five years in five weeks, people being forced to reassess where they live, work and eat.

Melinda McLaughlin, Head of Global Research at (DESCRIBE) Prologis, said: “The lesson learned from the pandemic is that the just-in-time supply chain model is not really designed to handle this kind of large-scale disruption. ladder.”

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

Logistics Real Estate Absorption Increased by 96%

Dry warehouse absorption increased 96% in the second quarter from a year ago, Cushman & Wakefield said, while new supply simultaneously fell 14%.

“This market momentum has dramatically increased rents and valuations for all logistics assets, with demand having exceeded supply by 45% since the start of the year,” 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 broader basis. This led Global X ETFs to increase its e-commerce penetration forecast for 2030 from 22% to 34%.

The Prologis Industrial Business Indicator (IBI) activity index fell from a high of 50 in the first quarter of 2021 to a low of 70 in the second quarter, the highest on record. Consumer confidence and retail sales are strong.

At the same time, the savings rate is higher than pre-pandemic levels, which could translate into sustained high consumption for the foreseeable future and support continued supply chain activity. The change from in-store to online modality, where more than 20% of all goods transactions now occur, stimulates demand, given the 3 times higher intensity of use. As a result, net absorption in the United States reached a record 110 MSF in 2Q21.

The report continues: “Rents are increasing at a record rate. Demand for e-commerce remains strong with a notable recovery in clothing, but demand is spread across many sectors. While demand for bulk space (over 100,000 square feet) is leading the pack, according to Cushman & Wakefield, small spaces are becoming more attractive to logistics customers as the economy recovers. In fact, customers are moving faster than ever, competing for space, and placing particular emphasis on securing a top-notch logistics space quickly. “

In the second quarter of 2021, the vacancy rate fell 40 basis points from the previous quarter to 4.1%. Rents increased across the board, with growth heavily concentrated in the bulk markets, development opportunities and the higher barrier coastal markets diminishing. Rental growth accelerated to 4% quarter over quarter and increased 10% last year. The main rental growth markets are Southern California, New York / New Jersey and Pennsylvania.

Rental rates and growth remain healthy

Supply is struggling to keep pace with rapid demand, according to Noyack. “Given the record demand, developers are working hard to monetize the permitted land. Housing starts have continued to grow, fueled by record rental rates and growth in asset values, but they do not appear to be large enough to weigh on rental rate levels and growth, ”the report said.

As a sign of strong demand, the pre-lease of the pipeline reached a record high of over 60%. In addition, supply growth has been largely driven by regional markets, smaller and lower supply barriers, with start-ups in large domestic markets focused on peripheral submarkets.

More importantly, the growth in construction costs has also been a record, alongside disruptions in material availability and extended delivery times. For the first time in more than five years in the United States, we see no market where supply seems to threaten vacant homes or local rents.

Noyack expects tight market conditions to persist through 2022 and possibly beyond. Prologis Research projects completions of 325 MSF in 2021. Large-scale demand will result in high absorption both in newer and larger spaces upstream of supply chains and in smaller filling units near the consumption side. supply chains. Therefore, we forecast 360 MSF of net absorption in 2021. As demand exceeds supply, the vacancy rate will end the year at 4.4%.

Net effective rent forecast to set a record

Limited availability, rising replacement costs and extreme competition are expected to drive rents up overall for the remainder of the year. Prologis Research predicts that full-year net effective market rental growth will set a record, exceeding 10%. “For clients looking to grow, the need for advance planning and rapid execution is paramount,” said Noyack.

Economic growth today requires more logistics real estate than in the past. Consumption has become the main driver of demand globally. Retail sales have a higher correlation with growth in logistics demand than past drivers, manufacturing and trade. Additionally, changes in the way we consume amplify this shift even further, as e-commerce is more space-intensive than retail.

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