The third report in a three-part series on the future of the logistics real estate market analyzes how emerging trends in transportation, labor efficiency, and consumer behavior may impact logistics real estate. Prologis predicts that these trends will primarily lead to increased supply chain efficiency and associated savings for users of logistics facilities. Some of them will choose to pay higher rents – especially for facilities located in urban infill areas, thereby gaining even greater efficiency gains.
The second study in this series demonstrated that logistics real estate is actually the smallest component of the core cost categories in the current supply chain – accounting for less than 5% of the total cost of delivery. For every dollar spent on rent, logistics real estate users spend 5-7 dollars on labor and 10 dollars on transportation. Consequently, this study, titled “Innovation, Disruption and the Value of Time: The Next 10 Years in Logistics Real Estate,” emphasizes that investments in alternative fuels and autonomous vehicles should contribute to a significant reduction in transportation costs in the long term, while investments in automation/robotics will allow for a drastic reduction in labor costs. Given the current distribution of costs in the supply chain, this efficiency gain has significant implications: calculations show that every 1% of savings in transportation and labor costs corresponds to 15-20% of logistics real estate rental costs.
There is a high probability that the real estate market will also benefit from this. The shift toward synchronized commerce and the emphasis on convenience, order fulfillment speed, and product variety should lead to greater complexity in retail and supply chain operations, and appropriately prepared logistics real estate can facilitate the management of these complex processes.
Retail models are also changing as e-commerce supply chains evolve and the number of brick-and-mortar stores decreases. Retailers view their supply chains as a source of competitive advantage rather than a cost center, which is why they prioritize them. For supply chains, this means lower spending on retail and higher spending on logistics real estate – particularly facilities located near and within major population centers.
Prologis calculations show that rents in core markets are about 1.5-2 times higher (and sometimes even more) than in nearby/adjacent supply chain markets, see: the city of Warsaw and neighboring Błonie. Differences in rent across individual markets occurring over distances of about 120 km (1-2 hours of driving) also indicate significant disparities. Prologis Research grouped rent levels in seven leading logistics real estate and consumption markets globally by submarket and distance from the city center, and discovered that rents in infill and urban locations are 2-3 times higher than those in peripheral locations.
– Over the last 5 years, rents in global leading infill submarkets have nearly doubled; in our opinion, this massive growth will continue – says the report’s co-author, Dirk Sosef, Vice President of Research and Strategy, Prologis Europe. – We expect the rent index curve to be steep because customers have a business justification, the capability, and the willingness to pay for infill and urban locations.