Primed for Growth – New Trends Behind the Sustained Strength of Global Logistics

pdf-icon

Logistics has been one of global real estate’s best performing sectors this cycle as population, wealth, and consumption have continued their sustained trend of growth and concentration in global gateway cities.

However, this cycle has been different with respect to the logistics sector, as rent growth has been higher than historical relationships would suggest. Global logistics rent growth was approximately 7% in 2017, up from 4% growth in 2016, and ongoing macro themes suggest continued strength during the current market cycle and beyond.1

What are the drivers behind the novel, yet ultimately sustainable, level of logistics strength seen in recent years? Heitman continuously monitors logistics-focused data around the world, including port volumes, air cargo traffic movements, and infrastructure spending levels, which we use to regularly update our proprietary Logistics Index ranking, featuring prime global metro regions. Our proprietary Logistics Index gives us a clear and differentiated view of the global logistics market – with many levels of detail – and is one of numerous data points utilized in the compilation of Heitman’s Prime Cities Index, which ranks the world’s top 30 prime cities on a comprehensive basis. Top cities within Heitman’s Logistics Index that are also ranked within our overall Prime Cities Index include Hong Kong, Singapore, Shanghai, Tokyo, London, Amsterdam, Frankfurt, New York, and Paris.

Our research shows that while the traditional factor of high employment continues to play a key role in logistics real estate growth, the important new variables of accelerating e-commerce sales and increasing supply chain investment focused on B2B commerce – both of which were nascent in earlier market cycles – have come into their own during the current cycle and show no signs of slowing down.

It is the powerful combination of old-fashioned employment and demand growth bolstered by the irresistible secular trends of e-commerce expansion and supply chain investment that have helped to propel logistics real estate onto an elevated trajectory of long-term ascent.

Compelling Growth Drivers, Old and New
EMPLOYMENT AND DEMAND GROWTH

Robust employment has traditionally been a key driver of logistics real estate tenant demand, and that relationship continues to hold during this cycle, as employment in prime markets around the world has risen steadily in the wake of the global financial crisis. Strong job growth has translated into more consumption, which has in turn led to greater demand for warehouse space.

As shown in the following table, there is a high correlation in the US between non-farm private payrolls and net absorption of logistics real estate. In the US, non-farm private payroll numbers have been continually rising for nearly a decade, growing from less than 108 million in 2010 to more than 126 million in 2018, with a near record-low unemployment rate of 3.9% in the second quarter of 2018.2 3

CORRELATION TO NET ABSORPTION


*Ecom 2013-Current
Data Sources – GDP: Bureau of Economic Analysis; Non-residential Investment: Bureau of Economic Analysis; Consumer Expenditures: Bureau of Economic Analysis;
Core Retail Sales: US Census Bureau; Brick & Mortal Sales: US Census Bureau; E-commerce: US Census Bureau; ISM Non-manufacturing: Institute for Supply Man-agement; Non-farm Payrolls Private: Bureau of Economic Analysis; Industrial Production: Federal Reserve; Rail Volumes: Association of American Railroads; Industrial
Net Absorption: CoStar
Note: Correlation is on year-over-year growth of quarterly data points.

In the European Union, overall unemployment has declined to less than 7% in 2018 from a high of 11% in 2013.4 Unemployment in Japan is approximately 2.5%, down from a high of about 5.5% in 2009, and estimated unemployment in China has held steady at approximately 4% during the past several years.5 6

Increasing consumer demand has been a natural result of stronger employment numbers worldwide, with new higher-paying jobs for more skilled and educated workers. It is important to note that these higher-paying jobs are primarily available in economically dominant prime global cities, which continue to attract and retain an outsized and growing proportion of the world’s wealth and talent.

24% of the world’s population, 49% of world GDP, and 67% of world growth is encompassed by only 300 cities, many of them prime cities

It has been estimated that approximately 24% of the world’s population, 49% of world GDP, and 67% of world growth is encompassed by only 300 cities, many of them top-tier, prime cities with global profiles.7 Further illustrating the concentration of resources into select prime cities are reports showing that the world’s top 25 ports account for 50% of all global container traffic.8 9

The urbanization indicated by these statistics has led to increased income for millions of consumers around the world. It has been projected that three billion people will have entered the consuming class between 1990 and 2025, more than half of whom will live in large cities.10 As incomes rise, increased demand for progressively expensive goods also increases. In the prime city of Beijing, for example, individual expenditure on transportation and communication markedly increases once annual income exceeds $6,000, dining out begins a firm upward trajectory at an annual salary of approximately $9,000, and purchases of pricier goods such as fruit juice, wine, and chocolate show strong adoption after yearly income of more than $17,000 has been achieved.11

From 2012 to 2025, global port capacity for container traffic will need to expand by more than 2.5 times, according to estimates

Going hand in hand with higher consumption is increased trade, which will necessitate substantial new investment in logistics-related infrastructure, including warehouses and ports. It is estimated that from 2012 to 2025, global port capacity for container traffic will need to expand by more than 2.5 times, or the equivalent of approximately 24 new ports the size of Shanghai’s port, the largest in the world.12

Along with an increased concentration of consumer demand, which contributes to new demand for warehouse and port space, the clustering of opportunities in prime global cities raises population density and heightens land shortages, further contributing to logistics real estate rent growth. Land scarcity in the Greater Tokyo area, for example, has led logistics-focused J-REIT CRE Logistics REIT, Inc. to decontaminate two brownfield sites for facilities completed in 2017, with more brownfield development currently in progress.13 14 Similar brownfield redevelopments have been occurring in densely populated areas like the New York metro area, and some of the first multi-story warehouse developments are being built in the US.

E-COMMERCE EXPANSION

While the well-known links between employment, rising income, and logistics growth remain solidly in place, the recent rise of e-commerce has also been strongly correlated to net absorption, as shown in the preceding correlations table. Our research indicates that e-commerce accounts for approximately 18% of logistics real estate demand, and this e-commerce-driven demand stems in large part from the increasing importance of speed to market and delivery of products to end consumers.

Every $1 billion of annual incremental online sales generates demand for 1.25 million square feet of logistics space, according to estimates

It has been estimated that every $1 billion of annual incremental online sales generates demand for 1.25 million square feet of logistics space, with companies that deliver goods to consumers building out their last-mile networks to enable next-day and same-day delivery services.15 16 The heightened need for speed to market has fueled a huge expansion in distribution networks, thus elevating space demand, and has opened up new locations for investment.

This dynamic has been observed at both metro area and submarket levels, and the growth of e-commerce around the world shows no signs of diminishing. In the US, e-commerce sales totaled more than $400 billion in 2017, and e-commerce sales as a percentage of total retail sales have risen more than two-fold since the first quarter of 2009, from 3.5% in the first quarter of 2009 to 9.4% in the first quarter of 2018.17 US online sales have been projected to grow by over 30% from 2017 to 2020.18

Online retail sales in Western Europe are expected to grow at an average of nearly 12% per year from 2017 to 2022, more than ten times faster than Western Europe’s overall retail market, with 21% of the market’s non-grocery sales projected to be online by 2022.19

The tangible effects of this growth on logistics real estate is evident in the following chart, which shows that the sector’s vacancy rate across 10 key European countries – including Germany, France, UK, the Netherlands, Italy, Spain, Poland, Belgium, the Czech Republic, and Hungary – has continually fallen over the past five years, with net absorption consistently outpacing completions.

SUM OF 10 KEY EUROPEAN COUNTRIES*


* Germany, France, UK, Netherlands, Italy, Spain, Poland, Belgium, Czech Republic, Hungary.
Source: CBRE-EA; Heitman Research

In the Netherlands, the prime city of Amsterdam has benefited from the rising prominence of Amsterdam Schiphol Airport in global e-commerce. The airport, which has been actively investing in logistics systems to expedite package processing and decrease customs delays, is becoming known as an international “e-commerce gateway,” and is now seen as the preferred e-commerce hub linking Europe to China.20 Amsterdam Schiphol dispatches more than 100 flights per week to Chinese cities, and its surrounding submarket has become a particularly attractive location for logistics real estate development.21 22

In the Asia-Pacific region, combined online retail revenues in Japan, China, South Korea, India, and Australia already surpass the combined total of corresponding revenues in the US and Western Europe. Total online revenues in these five Asia-Pacific countries are expected to grow by more than 60% from $862 billion in 2016 to $1.4 trillion in 2021.23

Just as Amsterdam’s logistics market has benefited from the strong links between Schiphol Airport and expanding e-commerce, so has the prime city of Hong Kong benefited from the outsized utility of Hong Kong International Airport (HKIA). HKIA, which is ranked as the world’s busiest airport with respect to international air cargo, will be the site of a new $1.5 billion logistics center developed by Cainiao, the logistics arm of Chinese e-commerce giant Alibaba. Slated to open in 2023, the new center will be the third-largest warehouse in Hong Kong, with an estimated gross floor area of 380,000 square meters, and is a key part of Cainiao’s plan to achieve 72-hour global delivery.24 25

In Japan’s logistics market, a July 2018 industry survey indicated that the most common reason for expectations of logistics rental growth was robust profits in the e-commerce industry, with major e-commerce firms like Amazon and Rakuten seeing increased sales in Japan every year since 2013.26 27 Tokyo-based Rakuten generated domestic e-commerce sales that increased by over 25% in fiscal year 2017 alone, and has contributed to a trend of brisk logistics property leasing by e-commerce firms in Japan, including its recent rental of a Greater Tokyo area logistics property completed in May 2018 by developer Global Logistics Properties. Another Japanese e-commerce firm, Locondo, has pre-leased a Greater Tokyo area logistics facility scheduled for delivery in March 2020.28

SUPPLY CHAIN INVESTMENT

Our research shows that supply chain real estate investment, meaning logistics real estate investment that is made by businesses and is not directly related to e-commerce, has also been a material driver of excess net absorption during the current market cycle. It has been observed that the phenomenon of a B2B “psychological time squeeze” is taking root across markets, with businesses seeking to decrease the time between order and receipt of inputs from other businesses, just as end retail customers demand shorter times between order and delivery of retail goods.

Businesses are addressing swifter B2B delivery demands and increasing freight and labor costs by leasing more warehouse space closer to customers

The heightened time-related demands in B2B commerce are evidenced by emerging logistics services like Ware2Go, launched by UPS in the third quarter of 2018. Ware2Go, a web portal that matches companies’ warehousing and fulfillment needs with a network of warehouses and fulfillment centers, targets small- and mid-sized businesses shipping products to other businesses, and provides a two-day delivery guarantee.29

While striving for shorter B2B delivery times, companies are also seeking to minimize increasing freight and labor costs in the face of driver shortage concerns. In the US, there was a shortage of approximately 50,000 drivers at the end of 2017, along with driver turnover of approximately 90%, with less than 3% of applicants meeting necessary quality criteria.30

The unified solution being implemented by businesses to address both the swifter B2B delivery demands and increasing freight and labor costs is the lease of more warehouse space closer to customers. This is practical in large part because real estate rent currently accounts for about 5% of total logistics spend for US businesses, while transportation and labor, by contrast, together account for approximately 60%.31

An Additional Factor
FACILITY MODERNIZATION

While demand for expanded logistics real estate supply continues to grow, e-commerce and supply chain investment have also contributed to demand for modernized bulk distribution facilities to replace aging existing supply. In the US, average warehouse age is 34 years, and many older facilities lack the high ceilings, multiple loading bays, and larger floor space needed to accommodate automated supply chains and order management for the bulk distribution portion of e-commerce networks.32

Only about 11% of warehouse inventory in the US rises to modern specs, indicating that replacement of obsolete warehouses with modern facilities will continue

Warehouses with these features are in high demand, with three quarters of US warehouses that went under new leases in 2016 and 2017 built within the past five years.33 Even so, warehousing rising to modern specifications still comprises only approximately 11% of warehousing inventory in the United States, indicating that the replacement of obsolete warehouses with modern facilities will continue into the foreseeable future.34

Similar opportunities for facility replacement and modernization are evident in Asia. A survey by the Tokyo Metropolitan Area Traffic Planning Council conducted in 2013 showed that more than 25% of surveyed logistics facilities in Tokyo were built before 1980. For tax purposes, the useful life of logistics facilities in Tokyo is about 38 years, implying that a large proportion of logistics facilities in this prime city have exceeded their useful life and are ripe for modernization and redevelopment.35 And in the Chinese market, land supply is constrained, but most existing warehousing inventory consists of single-story buildings using space that could be utilized much more efficiently.36

Our research shows that, in Europe, there is a gradual shift by logistics facility occupiers from specialized assets to the customizable “box” that is now the global standard. Until the 2000s, logistics space in Europe was largely owner-occupied and built for a specific user’s needs, rather than designed for a wide range of possible occupants.37 The existence of border checks across Western Europe until the mid-1990s prevented pan-European distribution models. Logisticians and the property markets that served them remained largely in national silos until the 2000s, with buildings mostly sub-scale and characterized by non-standardized designs.38 The growth of pan-European supply chains in the 2000s coincided with the emergence of pan-European logistics developers and investors, leading to the transition to standardized and customizable “box” facilities. This transition remains incomplete and continues to this day.39

It should be noted that while we see clear demand overall for modernization of warehousing related to bulk distribution networks, the criteria that tenants maintain for last-mile facilities are quite different. For last-mile networks, facility location is paramount, and tenants are generally willing to compromise on building features like clear height and extra trailer parking in order to gain greater speed to market.

This is part of why logistics has broken free from its historical pattern in which rents rarely grew above inflation over any extended period of time. As shown in the following chart, logistics rents have grown well above an inflationary pace for several years now, and we believe that this trend will continue, in part, because industrial real estate is no longer as commoditized as it has been in the past.

LOGISTICS RENT GROWTH VERSUS US INFLATION (CPI)
US Q4 2001–Q2 2018


Source: Oxford Economics; CoStar; Heitman Research

Conclusion

Logistics real estate – particularly in prime global cities – is uniquely positioned for attractive and sustained long-term growth

Logistics has been one of the strongest global real estate sectors across market cycles, and was previously driven primarily by traditional macroeconomic factors, including increasing employment. However, the current market cycle has seen particularly robust logistics performance that cannot be explained solely by historical correlations with employment growth and accompanying increased demand. Our research shows that this cycle’s elevated level of logistics performance can largely be explained by the accelerating and sustainable new phenomena of e-commerce growth and B2B-focused supply chain investment. A major reason that we have witnessed – and expect to continue to see – above-average rent growth in the sector is because logistics properties have become less commodity-like given the strengthening emphasis placed on speed to market for both end consumer and B2B orders.

With indicators pointing to continued e-commerce expansion and supply chain investment, as well as an increasing global population that will bring higher consumption, we believe logistics real estate – particularly in prime global cities – is uniquely positioned for attractive and sustained long-term growth.


REFERENCES

  1. Prologis, “2017: A Year of Accelerated Rent Growth,” https://www.prologis.com, (February 2018).
  2. Automatic Data Processing, Inc., Total Nonfarm Private Payroll Employment [NPPTTL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/NPPTTL, (accessed October 2018).
  3. National Conference of State Legislatures, “National Employment Monthly Update,” http://www.ncsl.org/, (accessed November 2018).
  4. Eurostat, “Unemployment rate – Seasonally adjusted data,” https://www.ec.europa.eu/eurostat/en, (accessed October 2018).
  5. Trading Economics, “Japan Unemployment Rate,” https://tradingeconomics.com, (accessed October 2018).
  6. Statista, “China: unemployment rate from 2012 to 2023,” https://www.statista.com, (accessed October 2018).
  7. Brookings, “Global Metro Monitor 2018,” (June 2018).
  8. World Shipping Council, “Top 50 World Container Ports,” http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports, (accessed November 2018).
  9. United Nations, “Container Port Throughput, annual, 2010-2017,” http://unctadstat.unctad.org/wds, (accessed November 2018).
  10. McKinsey, “Urban world: Cities and the rise of the consuming class,” https://www.mckinsey.com/, (June 2012).
  11. Ibid.
  12. Ibid.
  13. Shared Research Inc., “CRE / 3458,” https://sharedresearch.jp, (January 2018).
  14. Savills, “Spotlight Japan Logistics,” (September 2018).
  15. CBRE, “The US Supply Chain Quandary: Finding Enough Workers for an Expanding I&L Sector,” https://www.cbre.us, (2018).
  16. Logistics Management, “State of Industrial Real Estate: It’s crunch time,” https://www.logisticsmgmt.com, (March 2018).
  17. US Census Bureau, “Quarterly Retail E-Commerce Sales, 2nd Quarter 2018” https://www.census.gov, (August 2018).
  18. CBRE, “The US Supply Chain Quandary: Finding Enough Workers for an Expanding I&L Sector,” https://www.cbre.us, (2018).
  19. Forrester, “Online Sales in Europe Are Growing 10 Times Faster Than the Retail Market,” https://www.forrester.com, (February 2018).
  20. Air Cargo World, “Going Dutch: How Schiphol is Solving Cross-border E-commerce issues,” https://aircargoworld.com, (March 2018).
  21. Schiphol, “Schiphol Cargo Marks Growth in Chinese, Latam and African Markets in First Quarter 2018,” https://www.schiphol.nl, (May 2018).
  22. Colliers International, “The Dutch Real Estate Market,” http://www.colliers.com, (August 2017).
  23. Forrester, “eCommerce Trends and Outlook for Asia Pacific,” https://www.forrester.com, (June 2017).
  24. Air Cargo Week, “Cainiao Network to Develop Premium Logistics Centre in Hong Kong,” https://www.aircargoweek.com, (June 2018).
  25. The Hong Kong Maritime Hub, “New Logistics Hub for HK International Airport,” http://www.hongkongmaritimehub.com, (June 2018).
  26. Savills, “Spotlight Japan Logistics,” (September 2018).
  27. Savills, “Spotlight Japan Logistics,” (April 2018).
  28. Savills, “Spotlight Japan Logistics,” (September 2018).
  29. B2B E-Commerce World, “Old Warehouses Can’t Keep Up with E-commerce Growth,” https://www.digitalcommerce360.com, (September 2018).
  30. JLL, “Continuing Transformation of the Global Supply Chain and the Impact on Industrial Real Estate,” (May 2018).
  31. Ibid.
  32. B2B E-Commerce World, “Old Warehouses Can’t Keep Up with E-commerce Growth,” https://www.digitalcommerce360.com, (September 2018).
  33. Ibid.
  34. FreightWaves, “Chinese Logistics Partnership Gets $1.75 Billion in Funding to Grow Its Logistics Real-Estate Footprint,” https://www.freightwaves.com, (August 2018).
  35. Savills, “Spotlight Japan Logistics,” (September 2018).
  36. FreightWaves, “Chinese Logistics Partnership Gets $1.75 Billion in Funding to Grow Its Logistics Real-Estate Footprint,” https://www.freightwaves.com, (August 2018).
  37. Heitman, “Heads, Beds, and Sheds: Targets for Growth in European Property,” published in IPE Real Assets, (September/October 2018).
  38. Ibid.
  39. Ibid.


Disclaimer

Although the written materials contained herein were prepared from sources and data presumed by Heitman to be reliable, Heitman makes no representation or warranty, express or implied, with respect to their accuracy, timeliness, or completeness. You are additionally informed that any information contained herein is always subject to change without notice. Finally, any statements contained herein that are “forward-looking statements” or otherwise are not historical facts but rather are based on expectations, estimates, projections, and opinions of Heitman involve known and unknown risks, uncertainties, and other factors. Actual events or results may differ materially from those reflected or contemplated in such statements. Accordingly, Heitman expressly disclaims any responsibility or liability for any loss or damage that may be incurred by any party who relies on the written materials contained herein.

Confidentiality Notice

The information contained herein is confidential and shall not be copied, reproduced, used, or disclosed, in whole or in part, without the express written consent of Heitman, which may be withheld in Heitman’s sole and absolute discretion.