This commentary appeared in the print edition of the Jan. 6, 2020, Journal of Commerce Annual Review and Outlook.
Logistics real estate might seem simple enough: four walls, a roof, and some parking. Yet the reality is that the sector as a whole is quickly evolving into much more. Today’s forward-thinking logistics customers who want to outpace their competitors expect and need much more — from quality locations to special services.
Over the last 18 months, supply chain overhauls in the United States have been more prominent than at any point over the past decade. At Prologis, we ask ourselves this question every day: What is the customer perspective on supply chain evolution and, in light of that, how do we best meet their needs? Logistics facilities have always had the ability to save on inventory, labor, or transportation costs, but the stakes have changed. In today’s marketplace of online and omnichannel retail, logistics facilities have become differentiators in that they are now at the front line of revenue possibilities. Our conversations with customers have surfaced two main factors on their minds.
First, customers are going to new locations, but not in the way they have done in the past. Historically, logistics real estate growth was concentrated in big box facilities that enabled the flow of global trade into and across the US. That growth continues, but now it is driven by e-commerce and the desire for overall speed to market. As such, customers are increasingly focused on infill real estate in the form of last-touch and city distribution facilities. Historically, these types of properties were overlooked by logistics real estate developers and customers alike, due to the inherent complexities of infill redevelopment. Today, infill is more active than ever, with Prologis leading the way in key markets such as New York, Los Angeles, San Francisco, and Chicago.
Second, securing new space in today’s marketplace is challenging. Vacancy rates remain historically low. At play are multiple factors that have kept new development from being significantly stronger. Construction costs have spiked, driven by higher prices for materials such as steel and concrete, as well as for land, labor, and construction expertise. In addition, high-quality land sites are scarce, and in some cases, infill land is simply not available for larger facilities. Customers armed with a thorough planning process and the willingness and ability to act quickly are best positioned to secure just the right logistics space.