• ITVI.USA
    15,076.880
    -5.440
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  • OTRI.USA
    24.500
    -0.400
    -1.6%
  • OTVI.USA
    15,056.840
    7.440
    0%
  • TLT.USA
    2.730
    0.000
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  • TSTOPVRPM.ATLPHL
    3.070
    0.150
    5.1%
  • TSTOPVRPM.CHIATL
    2.860
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  • TSTOPVRPM.DALLAX
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  • TSTOPVRPM.LAXDAL
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  • TSTOPVRPM.PHLCHI
    2.040
    -0.090
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  • TSTOPVRPM.LAXSEA
    3.350
    0.100
    3.1%
  • WAIT.USA
    126.000
    0.000
    0%
  • ITVI.USA
    15,076.880
    -5.440
    0%
  • OTRI.USA
    24.500
    -0.400
    -1.6%
  • OTVI.USA
    15,056.840
    7.440
    0%
  • TLT.USA
    2.730
    0.000
    0%
  • TSTOPVRPM.ATLPHL
    3.070
    0.150
    5.1%
  • TSTOPVRPM.CHIATL
    2.860
    -0.120
    -4%
  • TSTOPVRPM.DALLAX
    1.660
    0.230
    16.1%
  • TSTOPVRPM.LAXDAL
    2.950
    0.110
    3.9%
  • TSTOPVRPM.PHLCHI
    2.040
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  • TSTOPVRPM.LAXSEA
    3.350
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  • WAIT.USA
    126.000
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NewsSupply ChainsWarehouse

Pandemic has ‘forever altered’ need for logistics space — Prologis

Report cites need for 3 billion to 4 billion square feet

The research arm of San Francisco-based real estate investment trust Prologis Inc. (NYSE: PLD) said in a report issued Wednesday the pandemic has “forever altered” the landscape for logistics real estate.

“The long-term structural growth rate of logistics real estate has risen” as “economic growth now requires more logistics real estate than in the past,” Prologis Research asserts. Not surprisingly, the surge in e-commerce fulfillment is driving the change.

E-commerce fulfillment requires more space

In 2020, global e-commerce penetration increased at a rapid rate, up 390 basis points, accounting for a full five years of adoption, according to the report. E-commerce accounted for 20% of all retail sales last year compared to only 4% in 2011.

E-commerce requires more than three times the space of traditional brick-and-mortar operations because all of the inventory sits in a warehouse. A large portion of merchandise in a retail store is kept on shelves. Also, online product menus have more variety and can experience greater volatility in sales, both requiring incremental space.

Prologis expects the share shift to e-commerce from brick-and-mortar to represent at least 125 million square feet of additional space required annually through 2025. That forecast only includes the U.S and Europe.

The group is calling for global e-commerce penetration to increase 150 basis points per year over the next five years. Some of the drivers cited were rising incomes among millennials — 23% of the world’s population — as well as an increase in dual-income households, both of which are key targets for retailers. Also, internet access has expanded to include more than 2 billion people in the past decade.

“Innovation and supply chain investments made during or in the wake of the pandemic should increase competitiveness of online options. This is especially true for segments with low e-commerce penetration prior to the pandemic such as grocery and home improvement,” the report stated.

There is also the expectation that many supply chains will look to operate with inventory levels that are 5% to 10% higher than normal in efforts to avoid the stockouts that were recently experienced. Prologis sees higher inventories creating the need for 57 million to 114 million square feet of additional space annually over the five-year period.

The forecast doesn’t factor in any sales growth. However, the group does expect a transition to spending on experiences, including in-store shopping, later in 2021 as the vaccine distribution advances.

Growth abroad is moving the needle

The report cited a growing global market for e-commerce as more economies see incomes advance and companies with well-established e-commerce supply chains look to replicate their success abroad.

“The resilience of the supply chain is being tested as companies expand globally, in turn driving the need for modern stock and decentralized networks. Coupled with a rising consumer class, this worldwide upgrade should generate the need for three to four billion square feet or more of modern logistics stock over the next cycle.”

That forecast suggests the adoption rate of modern logistics space could increase from 35 square feet per household today to roughly 40 to 50 square feet by 2030.

The report also noted that many tenants are now willing to pay higher rents in exchange for ideal locations. Rents only account for 5% of total supply chain costs compared to transportation, which can take up to half of the budget. Sophisticated supply chains view warehouse location as a competitive advantage and less of an expense.

Paying a higher rent in the right location is often negligible compared to choosing a less optimal spot. Additionally, advances in technology and warehouse automation have helped neutralize the impact of higher rents and labor costs in heavily populated urban areas.

“Demographic, economic and technological mega-trends will continue to drive the future of retail and supply chain planning, raising the structural long-term growth rate of logistics real estate demand through the next decade and beyond,” the report concluded.

Prologis Ventures is an investor in FreightWaves.

Click for more FreightWaves articles by Todd Maiden.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.

One Comment

  1. Not to mention reverse logistics. With the rapid growth of eCommerce there is a disproportionate growth in returns requiring even more space for reverse logistics.

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