The varying needs of supply chain-based industrial property occupiers paints a clear picture of how property categorizations shed light on the intersection of supply chain needs and different types of properties, according to a research report recently issued in a report by San Francisco-based real estate investment trust company Prologis.
The Prologis report, entitled “The Evolution of the Modern Supply Chain and Implications for Logistics Real Estate Performance,” states that current supply chains are going through what it called “a mission-critical evolution as service levels move to the forefront of businesses’ revenue generation potential.” And it added that through a combination of technology, data, and enhanced visibility into consumer needs, an increasingly competitive environment is driving urgency in supply chain reconfiguration.
These situations are driving change into how supply chain needs are matching up with various property types in different ways, according to the report, including:
The market is likely in the beginning stages of the current evolution, as structural supply chain shifts happen over multiple cycles, and can be measured through logistics real estate demand;
The combination of supply and demand shifts determines long-term real estate performance. Supply chain shifts generate demand and, in the absence of supply constraints, increased supply. In areas with supply constraints, they instead produce rapid rent growth; and
Looking forward, the future direction of supply chains should produce logistics real estate outperformance in Last Touch and City distribution properties, as well as highly-functional Gateway and Multi-market properties in areas with high barriers to new supply
A key theme of the report focused on how gateway logistics properties are well-positioned for distribution to several metro areas within a one-day truck drive and have access to a major sea or intermodal port within two hours at peak traffic. And it also observed that as more companies have moved production abroad, demand for logistics real estate in strategic locations have seen major growth. Using data going back to 1989, Prologis said that the rate of growth in occupied space in gateway properties saw 3% annual growth per year, topping the 2% per year level seen in over all logistics real estate.
Melinda McLaughlin, vice president of research, Prologis, said in an interview that structural supply chain shifts happen over multiple cycles, and this report measured this shift through logistics real estate demand.
“Strong demand for large, modern buildings that can move goods along global supply chains quickly has also invited development,” she said. “Non-supply constrained Gateway submarkets reflect this trend – for example, South Dallas, outlying Atlanta and Central Pennsylvania.”
In terms of how sustainable the pattern of globalization translating into larger buildings that are incorporating access to sea and intermodal ports is, McLaughlin said although e-commerce has forced the supply chain to skew toward end consumers and their delivery expectations, it has also increased the flow of goods through supply chains in general. “That translates to demand for highly functional and well-located facilities at all stages of the supply chain,” she explained. “It’s important to note, however, that the process of optimizing supply chains is ongoing, and therefore, it is hard to predict when the pattern will shift. What we can say is that we continue to see strong demand for these type of buildings today.”
Last touch and city locations differences: With consumer demands having increased, resulting in increased congestion, the report noted there has been a shortage of new product coming online in urban locations. Prologis, said, this, in turn, led to what it called a ripple effect with logistics real estate, with rents for last touch and city distribution facilities two-to-three times more than those in peripheral locations.
McLaughlin noted that the lack of supply in Last Touch and City distribution facilities, along with the growing need to be close to end consumers, present the greatest pricing power for the category as a whole.
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