Consumer-driven e-commerce is pushing demand for modern logistics facilities in new locations around the world. 

10/06/2016 | by isn’t the only company in the world changing expectations about how and when consumers get the things they want delivered. The impact of e-commerce and other trends in the retail business have transformed the industrial real estate market and strengthened fundamentals for industrial REITs in both domestic and global markets.

“Rents rose 6 percent globally and 9 percent in the U.S. in 2015. This year, we continue to see growth of about 5 percent in the U.S., for example,” says Chris Caton, senior vice president and head of global research for Prologis (NYSE: PLD). “It’s still a strong story: We’re getting decent demand growth in spite of slowing economies around the world.”

Britton Winterer, senior vice president for investments at Gramercy Property Trust (NYSE: GPT), says that institutional capital in industrial real estate has driven pricing higher.

“Industrial real estate isn’t very sexy, but it’s certainly more attractive now than in the past,” Winterer says.

Reaching the Last Mile

Caton says that while there are several factors on both the demand and supply side that are boosting industrial fundamentals right now, the rise of e-commerce is anticipated to further strengthen the sector in future years.

“We’re in the early innings of e-commerce right now, so there’s still a lot of opportunity there for growth,” says Caton. “But e-commerce is only part of the story, and there’s a lot of diversity within our industry.”

Chuck Sullivan, head of the U.S. platform for Global Logistics Properties (SGX: MCO.SI), says that GLP has experienced double-digit growth in e-commerce in every market where they invest, including the U.S., China, Japan and Brazil.

“While e-commerce is directly tied to only about 10 to 15 percent of GPT’s portfolio now, e-commerce is projected to grow to 30 percent or more of the global economy and will have a real impact on industrial space,” says Winterer. “Every time we look at a building now we consider whether it could work as an e-commerce space.”

Caton says that a decade ago, e-commerce meant retailers wanted specialized buildings, but now the emphasis is on logistics and proximity to consumers to solve the “last mile” challenge of the final leg of delivery.

“Prologis was ahead of the curve among REITs in rebranding itself as a logistics and solutions company, rather than one that owns warehouses,” says David Toti, managing director of BB&T Capital Markets.

e-Commerce and other demand drivers

Consumer consumption is among the three top demand drivers in the global industrial sector, according to Caton.

“Consumer consumption is growing in developed markets, and there’s an emerging consumer class in China, Mexico and Brazil,” says Caton. “The other two demand drivers are the modernization of the supply chain and trade, particularly in gateway markets.”

Caton says e-commerce is growing globally by 20 percent per year, particularly in the U.S., Europe, Japan and China.

Sixteen percent of GLP’s portfolio is invested in e-commerce sites, but in China e-commerce represents 26 percent of the company’s portfolio, Sullivan notess.

“The interesting thing about e-commerce is that most customers are looking for both a large facility in a major population area and a series of smaller places for fast fulfillment,” he says.

Prologis has a large footprint of e-commerce sites, with some as small as 10,000 square feet and some as large as 1 million square feet. There’s also diversity in age, with some modern sites and others more than a decade old, according to Caton.

“Shorter and shorter delivery times in the U.S. and continental Europe mean locations need to be within and adjacent to major population areas to reach consumers quickly and reduce transit costs,” he says. “This is a shift away from more centralized but distanced areas. The trend is also visible in emerging markets, such as in China, Brazil and Mexico, where this type of expansion is a relatively recent phenomenon. In the U.K. and Japan, it has been a trend for a while because the populations are relatively more concentrated.”

Toti says that the need for efficiency and faster delivery means there’s significant room for growth in the industrial sector, even in a recessionary environment. Caton also points out that restructuring of the supply chain happens in both good and bad economic cycles, which is good news for the industrial sector.

“Earlier distribution channels were always essentially a hub-and-spoke model, but now that businesses are focused on shortened delivery times, a spider web pattern of industrial sites is needed,” says Evan Smith, vice president for REIT equity research with BB&T Capital Markets.

Vacancies are down in most global markets and rents are up, yet development has recovered gradually with a notable component remaining as build-to-suit, rather than speculative, says Caton.

Even though GLP is cautiously evaluating the economic slowdown, Sullivan says the company is starting $2.1 billion in global development in fiscal year 2017, $1.2 billion of which is in China.

“A big part of the industrial story is the lack of development of industrial real estate during and after the economic downturn, even as rents have risen,” Caton says. “Part of this is just because both land and labor costs are rising, but it’s also because of the institutionalization of our business which means that investment committees are involved with decision making, and they have less of an appetite for risk since the global financial crisis.”


Not surprisingly, China is the story in Asia’s industrial real estate market.

“The Chinese government’s efforts to reorient the economy to a consumer-driven economy have paid off, with 60 percent of Chinese GDP now consumer-driven,” Sullivan says.

Even though China’s growth has slowed, the expansion of the consumption economy and the rise of organized retail chain stores, pharmaceuticals and auto parts businesses are driving strong fundamentals in that market.

“China is dramatically undersupplied and has less than one foot of industrial space per capita compared to 70 feet per capita in the U.S.,” Caton says. “Development is active, and vacancy rates in the top 15 markets are stable in spite of the slower economic growth.”

In Japan, vacancies are extremely low and demand is strong for “best-in-class” modern logistics facilities, which are typically multi-story buildings, says Sullivan.



The fundamentals in Europe are not quite as good as in the U.S., but rents are rising and vacancy rates are declining there because of supply constraints, according to Winterer.

“The restructuring of supply chains across Europe has driven growth there for the past five years,” says Ross Smotrich, managing director and senior research analyst for Barclay’s Capital. “For awhile there was a dearth of modern facilities. Now e-commerce is driving demand in Europe, but on a different timeline than in the U.S. It could become more like the U.S. eventually, but most Europeans are still tied to grocery shopping daily and often live in smaller places without a lot of space for consumer goods.”

Smotrich says “last mile” development is needed in Europe. Although it’s tougher to build in there because of the lack of land, he says some REITs are finding locations for build-to-suit facilities.


Mexico and Brazil

Two of the larger economies in the Americas are seeing demand for industrial space grow.

“Mexico’s economy is uneven, but vacancy rates are down and development is improving there,” says Caton. “In spite of the fact that Brazil is in a deep recession, demand for industrial space is outperforming the economy. Vacancy rates are less than 5 percent there because of the need for modern buildings, but rents are down and values are flat to down. We still have confidence that Brazil will improve in 2017.”

While Sullivan agrees that the macroeconomic environment in Brazil is challenging, he says only 20 percent of logistics space in the country is modern. Therefore, demand remains strong. However, GLP is currently focused on customer retention there, rather than development.