By Meghan Hall
The magnitude of the impact that COVID-19 will have on the economy, and in turn, commercial real estate largely remains to be seen, but both end-users and investors are looking for strategies to withstand the market volatility that has already occurred, and will no doubt continue. However, there may be a silver lining to look out for some, according to a Prologis Special Report evaluating COVID-19 and its implications for logistics real estate. According to Prologis, the illness poses the greatest threat to market stability since The Great Recession, but logistics is well-positioned to weather coming changes in the real estate market.
“Prologis has a very long history, of really trying to fill information voids and be thoughtful on the matters in which we are expert,” explained Chris Caton, Prologis’ head of research. “A lot of has seemingly changed over the last three weeks, and we wanted to share what we’re hearing in the marketplace, what we’re seeing, to help drive a fact-based conversation.”
Caton added, “There is a lot of volatility in the media and in the financial markets, and there is enough uncertainty and negativity about what this means for the economy.” Some of that volatility and economic slowdown will impact commercial real estate, logistics included.
However, according to Prologis, there is a potential for logistics real estate to continue to fare well, despite uncertain market conditions, for a couple of reasons: structural trends that could lend a hand in property resiliency, and increased demand for logistics real estate, even as other property sectors contract.
Around the world, and as COVID-19 has spread, supply chains have been challenged due to the disruption of the production of movement and goods across regions, prompting logistics real estate users to plan for both a shortage of activity and a subsequent surge to replenish good, once businesses resume operations. Prologis points out that this particular type of volatility in the market has in turn produced stronger demands for logistics-related real estate.
And, while there is more short-term risk to real estate fundamentals, the source of demand for logistics real estate remains largely unchanged, as many of the goods that require logistics real estate and flow through supply chains are necessities such as food and beverage, medical supplies and consumer goods.
“We think there’s a potential shift higher in demand. You’re hearing it more frequently now around the need to have resilient supply chains,” said Caton. “Inventories have been developed to be lean and very cost-efficient, and we’re learning now that that is not necessarily the revenue-maximizing result. Recognizing the inherent uncertainty of businesses is important, and you’re hearing more companies start to talk about that. That will translate to carrying higher inventories, particularly in [locations] with close proximity to consumers – and that will drive demand.”
The growth of e-commerce and its increasing use due to shelter-in-place restrictions around the country will also have an impact. Online shopping grew 16.7 percent globally over the course of 2019, and Prologis predicts that COVID-19 may expedite the adoption of online shopping and increase the number of consumers who choose to buy their goods via the web.
“There is no doubt that e-commerce will continue to grow at a fast rate,” Caton added. “What I anticipate will happen is a wider range of folks using e-commerce, and buying a wide range of products.”
Additionally, the logistics industry has been working to push manufacturing to new locations, including reshoring, to create more efficient supply chains. Combined with e-commerce and the necessity of goods, Prologis explains that logistics is well-positioned in many capital markets. While a slowing market can be difficult for some to swallow, Caton says there is opportunity to be found.
For those who have been looking to break into high-barrier markets, now could be the time as other logistics space is freed up by firms watching their bottom line, or by those who are postponing their search for space to a later date.
“The logistics real estate industry has been particularly strong with really low market vacancy rates,” said Caton. “So, for customers it has been really difficult to secure space. This volatility may create an opportunity to secure that space. Now these companies will need to have confidence in their outlook and ability to take space, but we see that happening nearly every day.”
Investors too, have an opportunity to capitalize on changing market dynamics if they are smart and plan ahead. There is stability to be found.
“Watch out for resiliency,” Caton continued when offering advisor for property owners and investors. “I think some categories will present challenges; this pandemic is leading everyone to find workarounds…But we’re seeing these positive demand drivers surface for logistics real estate….and I think coupled with low interest rates, investors [could have] the potential to look through current volatility and continue to purchase logistics real estate.”