Prologis: location, not rent, is the top priority

The global pandemic has forever altered the logistics real estate landscape: supply chain decisions have become more holistic, more data-driven, and more urgent than ever. Underlying this shift are the same forces (urbanization, digitalization, and demographics) that have changed the way we live, work, and shop.

A new Prologis report aims to separate the transitory nature of human and company behavior during the pandemic from the real lasting forces that will continue to drive the supply chains of the future. Prologis Research expects a spike in spending on experiences, such as travel and entertainment, and in-store shopping in mid to late 2021 due to the release of pent-up demand created by COVID-19 restrictions.

Sustainable forces shaping logistics real estate demand include:

  1. The long-term structural growth rate of logistics real estate has risen. Consumption-oriented uses have grown as a share of logistics demand, while production- and trade-oriented uses have decreased.
  2. Technology and demographics are transforming retail. Consumer expectations have increased in a permanent way. Prologis Research forecasts that global e-commerce penetration will rise over the next five years. Physical retail will increasingly require rapid replenishment operations to compete.
  3. Logistics best practices are going global. The resilience of the supply chain is being tested as companies expand globally, in turn driving the need for modern stock and decentralized networks. Coupled with a rising consumer class, this worldwide upgrade should generate the need for three to four billion square feet or more of modern logistics stock over the next cycle.
  4. Location matters more than ever for logistics real estate customers. Supply chains are a key source of competitive advantage and will continue to drive financial performance.
  5. The price elasticity of demand has decreased. Network planning decisions can yield revenue generation and cost control benefits that substantially outweigh real estate expenses, which represent just 5% of overall supply chain costs.

Customers are now more willing to pay higher rents

This is in part because rent does not represent a large share of supply chain costs (only about 5%). More importantly, supply chains are increasingly viewed holistically and used as a competitive advantage. For most users, the revenue generation benefits from being able to meet consumer demands for product availability, choice, and delivery speed greatly outweigh the additional real estate costs. Locating closer to consumers reduces transportation costs, which account for about 50% of supply chain costs.

A recent study by MIT on carbon emissions revealed that adding an urban fulfillment center can cut transportation emissions (and therefore costs) by half compared to out-of-town distribution. Technology has lessened price sensitivity because it has enabled customers to increase productivity, particularly in urban locations with lower vacancies that have higher rents and higher labor costs compared to non-urban locations. 

Urbanization and rising consumer expectations will continue to increase the benefits of an urban location 

The world’s urban population doubled over the past 30 years and is forecast to double again during the next 30 years16 with major implications on consumption, transportation, and land use. Whether to the shelves or doorstep, consumers have been conditioned to expect more. Densifying consumption centers will produce larger revenue opportunities while rising consumer expectations and congestion will produce larger challenges for global supply chains.

Logistics real estate in locations close to end consumers offers the ability to reach homes and retail outlets quickly and realize transportation cost savings – key sources of competitive advantage today and in the future. 

Source: Prologis

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