Infill Logistics Demand to Last: Report
- Aug 18, 2020
The global pandemic has accelerated the need for resilient supply chains, while strongly increasing demand for cold storage space and infill logistics real estate, according to Elion Partners’ new special report.
As noted in the report, before COVID-19 gripped the U.S., the logistics real estate sector was already firing on all cylinders, with rising e-commerce activity resulting in high occupancy levels and rents that had been climbing steadily since around 2013. “The shift in consumer behavior toward e-commerce is expected to continue to advance in a post-pandemic world, making the current environment a secular trend instead of a real estate cycle,” according to the Elion report. “This ‘new normal’ has accelerated the urgency to build out resilient supply chains and increased demand for cold storage space through the surge in online grocery shoppers, bolstering the need for infill locations among an already active logistics real estate market.”
Supply chain of tomorrow
The rapid spread of the coronavirus and resulting spike in e-commerce activity amid widespread shutdowns revealed a flaw in supply chains that was not detectable pre-pandemic: inventory-control failures. E-commerce sales rose 104 percent in June 2020, and supply chains, unprepared to accommodate the sudden skyrocket in demand, have had to expedite their diversification strategies in an effort to increase inventory carry and decrease shock and volatility risk in the future.
To create supply chain resiliency, new inventory controls are pointing to the need for larger and more diverse facilities located closer to end users. As companies expand their “buffer stock,” the demand for logistics space will rise. Elion suggests that in addition to increased local inventory, the new, more resilient supply chain model should include supplier diversification and multimodal transportation options, as well as the leveraging of existing retail infrastructure to synchronize collection and delivery activity.
Cold storage heating up
The pandemic-induced rise in online grocery sales has caused substantial disruption in the food industry, Elion notes. Online grocery sales soared by more than 100 percent when stay-at-home orders commenced in March and have been on the rise every month since, as consumers shift preferences away from in-store shopping in favor of at-home delivery and in-store pickups. Elion refers to a CBRE report that indicates that cold storage space in and near large population centers will produce the highest demand for logistics real estate space. To accommodate the ongoing rise in demand for at-home deliveries and in-store pickups, the industrial real estate market will require an additional 75 to 100 million square feet of cold storage over the next five years.
Elion highlights the fact that with both e-commerce and non-e-commerce logistics space users calling for more logistics square footage, the investment community’s eagerness to remain active in the sector will be ongoing, with no end in sight. The combination of tightening vacancy rates and rising rents across supply-constrained markets will continue to serve as a magnet for investors over the long term. “Given the current environment, we have not seen and do not project to see much in terms of distress among logistics real estate pricing across these markets,” according to Elion.
Read the full report on Elion Partners’ website.