The logistics real estate niche is still simmering in an otherwise tepid real estate market. The logic defying mystery of the market begs the question, if it is still simmering in today’s economic environment, what will it do in ’24?

The logistics real estate niche is still simmering in an otherwise tepid real estate market. The logic defying mystery of the market begs the question, if it is still simmering in today’s economic environment, what will it do in ’24?

The market for logistics real estate has been hot like the asphalt on a West Texas highway in July. Maybe it shouldn’t be. There are plenty of adverse indicators for the logistics real estate market just as there is for real estate in general. But like the much anticipated next “recession”, the real downturn seems to keep getting kicked a little further down the road.

Certainly, there are a number of underlying factors at play. Take for instance, a scarcity of available property for development, high warehouse rents and up until recently, an abundance of inventory vying for that space — a lingering inventory reminder on the warehouse racks of the disorderly ordering that followed a disruptive cycle in the supply chain.

But this is not to say there isn’t some cooling in the logistics real estate marketplace — the rapid rise in the cost of capital, stubborn inflation, slow GDP growth, and falling US import demand are all having an impact. As a result, the 4th quarter is expected to be much cooler than the first half of 2023. According to a recent report from Interact Analysis, warehouse construction in North America and Europe has declined by 25% during 2023. This after two years of growth coming out of COVID.

Still even with all of these dampening factors — which in most [possibly any other] economic times would have been enough to put a polar freeze on any market expansion — the logistics real estate market has relentlessly continued to move forward in spite of the stagflation prone US economy.

After all, it is hard to miss all the ground breakings and deal making announcements that have doggedly persisted despite the downturn in the economic climate. No doubt, some of this construction activity is attributable to a clearing out of a post-COVID logjam of building projects.

Why? It is, as the old expression goes, complicated. It goes back to the new logistics panorama emerging in the post-pandemic environment.

Reconnecting the Links in the Supply Chain

The worldwide COVID-19 pandemic lockdowns created supply chain disruptions on a scale not seen since World War Two. As the world began to emerge from the pandemic and the supply chains began being re-established, it was clear that they wouldn’t be reconnected in exactly the same way as in the lead up period to the COVID outbreak.

In the U.S logistics market there have been some notable trends that are re-shaping the supply chain and in turn the logistics real estate market.

San Jose, California-based Allegro Real Estate Brokers & Advisors, a commercial real estate group, in a recent “Guide to Logistics Estate Transactions,” wrote in their analysis of top trends: “Rising trends, like the COVID-19 pandemic and the expectation of same-day delivery, continue to disrupt established distribution patterns as manufacturers and other industrial companies have seen massive increases in demand for faster delivery of goods and services. In turn, companies must expand their logistics infrastructure quickly to allow them to transport inventory where it’s needed rapidly and efficiently. However, as warehouse vacancy rates have dropped, rental rates for what remains have surged. The demand for logistics properties is likely to stay elevated for an extended period.”

No doubt one of the big impacts on logistics real estate is the rise in e-commerce. While e-commerce has been growing for a decade, there is little doubt that COVID accelerated the process. The need to locate goods closer to consumers has led to a demand for warehouse space near and in urban areas.

Chicago-based real estate firm Jones Lang LaSalle, better known as JLL, in their 2021 “The future of global logistics real estate” observed the same trend, writing “Brownfield urban infill sites will probably be the strongest opportunity to meet the growing demand for urban logistics. Multistory ramped logistics buildings are already an important solution in Asia Pacific, but this type of development is considered to have more potential in Europe than North America.”

In North America, the pandemic kick-started a trend of more workers operating from a “home-office” and boosted the already accelerating growth of e-commerce — largely at the expense of brick and mortar retail stores. These trends have underwritten both the demand for more urban warehousing and the re-purposing of office buildings – sometimes newly built – and even malls into new warehousing space. These factors are contributors to the resilience of the logistics real estate, even in less than ideal market conditions.

Location, Location, Location

There is an old saying that the three most important factors in real estate are location, location, location. And the “ideal” location for logistics real estate is shifting. The growth of East Coast and Gulf ports at the expense of West Coast ports has boosted interest in logistics real estate around these growing port centers. The labor unrest over contract talks on the West Coast and other economic issues has helped make the decision to invest in the Gulf and East Coast much easier. As Peter Friedmann, executive director, Agriculture Transportation Coalition (AGTC) explained, “These decisions include where should the warehouse be built, where should the cold storage facilities be built, where should transload facilities be built? West Coast or East Coast? I know that some decisions are being made about building transload facilities where they had previously considered building those locations on the West Coast because as the situation goes on and on people have got the money raised and they’ve got to put those structures in the ground. In the boardrooms of Chicago and Kansas City, they are making the decision to go to Norfolk, for example, rather than Oakland because they don’t want to wait. They have decisions that they have to make.” (See Stas Margaronis Feb 09, 2023, AJOT Insight: AgTC’S Friedmann says ILWU/PMA impasse could result in permanent West Coast port losses)

For the reasons Friedmann alluded to ports like Savannah, Houston and Dallas are now all hot logistic real estate market areas. For example, in May, CenterPoint reported “Construction is progressing on the second of three buildings at CenterPoint Industrial City Gardens in Garden City, GA. … The new facility will have unparalleled visibility in the market, sporting 1,200 feet of frontage on Dean Forest Rd., the main artery to the Port of Savannah’s Garden City Terminal 2 miles away.”

In a March report, CenterPoint said the company had “preleased a development under construction near Port Newark-Elizabeth to New Jersey-based CODA Logistics and Distribution. CenterPoint broke ground on the 321,765-square-foot Class A industrial distribution facility at 1501 W. Edgar Road in Linden in November 2022. Construction is expected to be completed in August. CenterPoint acquired the more than 20-acre site of a former Walmart-anchored shopping center in Q4 2020.”

And quite aside from the traditional logistics real estate, there is the “Amazon Effect” building new links in the supply chain. In May Amazon opened its biggest warehouse in New England in Windsor, Connecticut – a 5-story 3.8 million square foot Fulfillment Center. Back in 2020, Amazon opened a 1.4 million square foot “First Mile” Fulfillment Center in Deltona, Florida at the I-4 Logistics Park. And in April the e-commerce behemoth announced it was going to build another “First Mile” Fulfillment Center across the street.

Amazon, like other logistics operators, has slowed its construction program but nonetheless there clearly is a lot of groundbreaking coming in the near future.

What to look for in ‘24

The logistics real estate market looks like it will again be cooking in 2024.

Prologis in summing up their expectation for 2023 wrote, “To recap, competition for space may lessen in some markets as the construction pipeline empties and the pace of decision-making slows, but these circumstances will likely be short- lived. Planning for space is still important, particularly in the most critical locations where options should remain limited…”

It is the “limited” options for logistics real estate development that is now driving the market — a real estate niche that is outperforming expectations. CenterPoint in their release on their development near Port Newark (see above) shed some light on why the logistics segment still simmers while other segments of the real estate development have cooled off, “Even in the face of uncertain economic conditions and stabilized port volume, users continue to target the submarkets near the ports for relocation and expansion.”

But will simmering markets heat up or cool down in 2024?

Well, at least one group believes that warehouse construction will again pickup in 2024. In a recent release by Interact Analysis, the research company says, “Renewed E-commerce growth and shift to just-in-case supply chains will drive an uptick in warehouse construction in 2024.”

Interact Analysis, which produces the “Warehouse Building Stock Database” explained the logic behind the upbeat prediction is as follows, “Interact Analysis delved deeper into the data to find that e-commerce sales haven’t in fact come down despite seeing a declining share of e-commerce sales as a percentage of total retail sales. This is interesting as it suggests that demand for fulfillment capacity is likely to grow at a similar rate to that of pre-pandemic levels. The shift from just-in-time to just-in-case supply chains will also have an impact on the growth of warehouse construction. Many companies now factor in a greater degree of unpredictability, and this has a knock-on effect on warehouse construction, with companies requiring higher inventory and therefore more storage capacity. This is likely to drive an increase in warehouse construction during 2024 and 2025…”