The surge in ecommerce is having a big impact on commercial real estate, sending demand for warehouses – and the value of logistics assets – through the roof.
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Demand is especially high in Asia, where companies leased 32% more new warehouse space in 2020 than the year prior, according to real estate consultancy JLL. This increased by 21% in America and 16% in Europe. Globally, industrial and logistics real estate made up 20% of all transaction volumes in the same period. JLL reckons that even prior to the pandemic, from 2015 through 2020, purchases of logistics assets doubled, from a tenth of global property investments to a fifth.
Some of last year’s demand came from firms like grocers and medical suppliers tasked with filling sky-high offline orders. But by JLL’s estimate, one in four new leases in Western countries was related to ecommerce. In China ecommerce accounted for one in three. Amazon alone increased square footage across its fulfilment and logistics network by 50%.
Consequently warehouse vacancy rates have dropped to just 5% in America and Europe. In some markets, such as Toronto and Tokyo, they are under 2%. Those with existing assets are seeing their value skyrocket. The gross assets of warehouse developer Prologis, for example, are worth $10 billion more than they were only six months ago, according to The Economist. All of this is fuelling investment in logistics assets, and warehouse developers are scrambling to meet demand.
One issue is a simple lack of space, particularly in large cities, as the commercial real estate landscape has changed dramatically in the past few decades. Between 1990 and 2008, half of San Francisco’s industrial land was converted to residential and office space. London has 11% less industrial land than it did prior to 2015. And efforts to convert existing properties to distribution centres are hampered by high costs, current tenants and zoning laws.
Another obstacle, both to retail conversions and new site development, is public opposition. Warehouses are noisy, 24-hour operations, and bring with them traffic and pollution, none of which local residents welcome. The promise of new jobs often does little to sway them. Politicians say the jobs are low-skilled or at risk of being replaced by robots.
Some warehouse developers are taking creative approaches to repurpose industrial space. In September 2020 British firm SEGRO announced plans to develop an underground logistics hub beneath a Paris railway station. Amazon is converting golf courses into distribution centres in America, and a London car park into a delivery hub. Hybrids with both warehouse and residential space are also springing up. Developers are also raising rents, and watching their share prices rise.