Spending More on Logistics Real Estate in an Era of Changing Supply Chains
In the third paper of a three-part series looking at the future of logistics real estate, we examine the implications for logistics property in light of emerging trends for transport, labor productivity and consumer behavior. Prologis predicts these trends will create big efficiencies in supply chains and bring associated cost savings for users of logistics facilities – a proportion of which will go towards paying higher rents, especially for facilities located in urban infill areas, as this will lead to much higher efficiency gains.
The second paper in this series revealed that logistics real estate is actually the smallest cost component among major cost categories in supply chains right now, accounting for less than 5% of total cost to supply. For every $1 spent on rent, users of logistics real estate spend $5-7 on labor and $10 on transportation.
Therefore, in this third paper, titled “Innovation, Disruption and the Value of Time: The Next 10 Years in Logistics Real Estate”, we highlight that investments in alternative fuel sources and autonomous vehicles should push transportation costs down considerably over the long term, while automation/robotics investments will dramatically decrease labor expenditures. Given the current distribution of supply chain costs, efficiency gains in these areas will have significant implications: we calculate that each 1% saving on transport and labor equates to 15-20% of rent for logistics real estate.
And there is the distinct likelihood that real estate will capture a portion of that margin. The shift toward Synchronized Commerce and its emphasis on convenience, immediacy and product variety should lead to increased complexity in retail and supply chain operations, and well-positioned logistics real estate can help to manage that complexity.
Retailing models are also changing as e-commerce supply chains grow and retail footprints shrink. Retailers are increasingly seeing their supply chains as a competitive asset rather than a cost center and are prioritizing this capability. For supply chains, this means less will be spent on retail and more will be spent on logistics real estate – in particular, facilities near and within major population centers.
Our research attempts to quantify this. We calculate that logistics rents within major markets are around 1.5-2.0x higher (and sometimes more) than near-adjacent supply chain markets, such as the major market of Warsaw and adjacent Błonie. And rental rate differences within markets over distances spanning 120 kilometers (1- to 2-hour drive times) also illustrate stark differences. Prologis Research organized rental rates by submarket and distance to city center for the world’s top seven logistics real estate and consumption markets, and found that rents in infill and urban locations are 2-3x higher than in peripheral locations.
“Rents in the world’s leading infill submarkets have nearly doubled in the last five years; we believe this outsized growth will continue,” says the report’s co-author, Dirk Sosef, vice president research and strategy, Prologis Europe. “We expect the rent gradient to steepen as customers have the business case, capability and willingness to pay for infill and urban locations.”