Real InSite provides our views on topics affecting global real estate markets. In the latest monthly article, we examine the impact of the rise of ecommerce on demand for logistics real estate.
For more Real Estate articles, check out our Analysis of Real Estate issues.
Big boxes are in. Industrial real estate outperformed the all-property benchmark in nearly every region during 2016 (see Chart 1). Not surprisingly, industrial assets are currently at the top of the list for many institutional investors. Increased investor interest has helped lift total returns for industrial assets as more big players enter the market, driving up capital growth.
Capital growth is not the whole story, however. In the 30 global markets measured by MSCI in 2016, industrial assets had the strongest income returns in 18 of them. Landlords have pushed rents higher because industrial real estate is at, or near, historically low vacancy levels in most markets globally.
In the US, for example, logistics real estate has vacancies 350 basis points below the average since 2000, well below all other property types. Given that context, it is not surprising that logistics has had the strongest rental growth of any US property type for 15 quarters in a row. And it isn’t that developers aren’t building—logistics stock is growing at over 3% per year, which is typical for this part of the cycle. What has changed is the growth in demand for logistics space.
Distribution warehouses distribute wares, of course—but how those goods get to the consumer makes a big difference. All things being equal, there should be approximately a 1:1 relationship between growth in consumption and growth in demand. That seemed to be the case up until 2012, with the correlation between logistics demand and consumption at 0.72. Since then, the relationship has uncoupled, with much more demand for logistics space than consumption growth alone can account for (see Chart 2).
This divergence is largely attributable to the rise of e-commerce. While e-commerce sales are still just a fraction of retail sales globally, growth far exceeds the rest of retail (see Chart 3a). Distributing directly to an internet consumer is much less efficient than delivering to a bricks-and-mortar store given the space required to break up palettes, manage returns and the additional ‘last mile’ facilities necessary to ensure speedy delivery. As a result, e-commerce requires over twice as much space as traditional bricksand- mortar for a given amount of sales (see Chart 3b).
Therefore, even as e-commerce eats away at other retail sales, there is built in upside for logistics demand. According to large industrial REIT Prologis, just over 10% of space globally is currently dedicated to e-commerce, so there is plenty of room to grow—literally.
The opportunity that the rise in e-commerce presents is one of the key reasons that many logistics markets sit near the top of Standard Life Investments’ Real Estate House View, even after a prolonged period of outperformance. In deciding which logistics markets offer the best value, our research team has been hard at work studying the changing industrial real estate landscape. For example, investment analyst Lulu Wang recently published this insight paper on logistics real estate in the UK, with further global insight to follow.