By Meghan Hall
Modern-day consumerism continues to reach new heights thanks to technologies that have enabled faster delivery times and wider purchasing options. And, as e-commerce and technology continues to evolve, its impact on logistics real estate in markets around the country continues to be paramount, creating the need for a new standard lexicon to describe the submarket, according to San Francisco-based Prologis. The logistics real estate firm recently released a white paper on the modern supply chain and a new model for defining logistics real estate in an effort to establish a common language for the submarket.
“One thing I noticed was that there were lexicons for other property types that allow you to get a little bit more specific, but for logistics real estate, we really only had ‘warehouse distribution’ and ‘flex,’” explained U.S. Head of Prologis Research, Melinda McLaughlin. When Prologis compared descriptors for logistics real estate to retail, for example, the differences in available terminology were notable, continued McLaughlin, prompting them to move forward with the creation of a new vocabulary to help them, and their customers, approach logistics real estate more efficiently.
“The analogy I like to use is retail,” McLaughlin said. “You used to be either a mall or a strip center. But today, you have lifestyle centers, high-street retail, grocery-anchored. With those terms, you know instinctively what the property looks like, where it is likely located and who the tenants most likely are. It gives you a lot of information from just one descriptive word. We needed that for our property types.”
The need for a new lexicon has become particularly acute amidst changes to the modern supply chain, notes Prologis, as structural shifts in how consumers receive goods have also increased demand for logistics real estate around the country. Previously, the need for descriptive terminology was not as needed because the submarket was of a more limited scope.
“Generally, [logistics real estate] was a lot more fragmented, a little bit more niche, and a little less understood when it came to the value that it creates for the underlying user,” stated McLaughlin. “I think we have hit a really crucial time in our industry when the evolution of the supply chain really coincided with increased interest on multiple levels—from investors, from customers, from financial firms—anybody who has probably never thought about a warehouse before is now interested in it because of things such as e-commerce. The institutionalization of our industry, alongside some of these powerful structural forces, has really been driving shifts in supply chains and logistics real estate that brought us to this moment today.”
Prologis calls at four primary types of logistics real estate that are determined by requirements generated by e-commerce and high service-level expectations. Gateway facilities are often first along the supply chain, and are multi-market buildings that have access to major sea and intermodal ports in metros like Seattle and San Francisco. Multi-market distribution centers, which tend to be newer and larger, are located at transportation hubs but at the periphery of major urban areas. City distribution properties are positioned to provide one to two day shipping to a larger market, and are small- to mid-sized due to their locations. Last Touch properties are at the center of it all, and can reach large, dense, affluent populations within hours. They are often the oldest and smallest, because most are often infill locations.
“This is a consumption driven market, and consumers expect greater product variety, more convenience and much faster delivery times,” said McLaughlin. “When you look at the model of old, a company could have a couple of big facilities in the middle of the country, but they had time to deliver those products to the majority of the population. Today, with one-day deliveries, you cannot execute on that service-level from the center of the country.”
Additionally, stated McLaughlin, a decentralized network also has cost-upsides, as goods do not have to travel far to reach consumers, ultimately saving companies money. Metros such as the Bay Area often warrant Last Touch operations because challenges to on-time delivery—like in cities such as the Bay Area—mean that well-located facilities are all the more important. Large markets like the Bay Area also have larger aggregation potential; Prologis points out that the top eight markets in the U.S. have an aggregate income of more than $250 billion, driving consumer activity. Smaller, but growing cities, like Seattle, have an aggregate income of more than $100 billion and are more likely to focus on City Distribution Centers to fit their needs.
“The combination of underlying consumer habits changing and then some of these enabling technologies have really added a lot of positive momentum to the shift toward towards more decentralized, much more responsive inventory flows through supply chains,” McLaughlin said.
However, despite being largely driven by consumer activity, McLaughlin predicts that logistics real estate will remain stable in major cities like the Bay Area and Seattle, even if the economy were to slow and consumer spending to retract. Demand for logistics real estate continues to steadily outpace supply in such a way that a market correction might have some, but not a devastating, impact.
“We have such limited land, we have such high regulatory barriers to entry [in these markets], that in general, there is a lot more demand out there for logistics so that companies can have a presence to meet those high service level expectations than supply to satisfy it,” explained McLaughlin. “I think every metro will flex alongside cycles, but I think you won’t see the kind of reversion [expected]; there is just such an undersupply.”