Trends Report
Logistics Real Estate: Reshaping the Investment Landscape
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Introduction
Logistics real estate, which encompasses a diverse range of properties strategically designed to facilitate efficient storage, handling and distribution of goods, forms the backbone of the modern supply chains. Businesses of all sizes, from small retailers to large cooperations, rely on logistics real estate for efficiency.
Historically, the logistics sector has often been overlooked in the broader world of commercial real estate. However, the growing prominence of e-commerce, demand for more effective supply chain management, a rising middle class, and rapid urbanisation have all significantly elevated the importance of logistics real estate.
What is Logistics Real Estate
Logistics real estate consists of properties that are specifically designed to cater to companies’ logistics needs, including the storage, movement, and management of goods. It involves the rental and sale of a wide spectrum of facilities, each tailored to fulfil specific roles within the supply chain; and are typically developed either on a speculative or build-to-suit basis.
- Warehouses: Large buildings used for storing large quantities of products for sale or distribution, often long-term, from raw materials to finished goods and inventory.
- Speciality Warehouses: Specifically designed facilities to store goods or materials under specific environmental or safety conditions. For example, cold storage warehouses are used to store temperature-sensitive products such as pharmaceuticals, fresh food and other perishables.
- Distribution Centres: Distribution centres are facilities designed to receive, temporarily store, and redistribute products to retailers, wholesalers, or customers. These centres typically feature spacious layouts with high ceilings and wide aisles to accommodate the movement of large pallets. To maximise efficiency, many distribution centres are designed for cross-docking and high-density storage.
- Fulfilment Centres: Commonly used by online retailers and e-commerce companies, fulfilment centres pick, store, pack and ship goods to fulfil customer orders. Fulfilment centres feature conveyor systems and extensive shelving facilities to handle individual items efficiently. To minimise delivery times, fulfilment centres are often located close to urban centres.
Secular Themes driving Logistics Real Estate Demand
The logistics real estate sector has experienced explosive growth in recent years, underpinned by multiple structural tailwinds. These trends are likely to persist in the long term, ensuring that the asset class continues to remain popular among both occupiers and investors.
E-commerce and 3PL Growth Spurring Demand for Logistics Space
The global e-commerce market is experiencing exponential growth, with the combined B2B and B2C market value set to grow at a CAGR of over 14% to reach US$41 trillion between 2023 and 2026[1]. Asia Pacific (APAC) is a key beneficiary, accounting for 80% of the global market share. The rise in e-commerce has resulted logistics demand to surge. CBRE projects that an additional 1 million square feet of logistics space is required for every US$1 billion of growth in e-commerce sales[2].
The rise is e-commerce has also translated into demand for third-party logistics (3PL) providers. They play a crucial role in managing the complexities of modern supply chains, allowing e-commerce companies to focus on core business activities by outsourcing their logistics operations. Between 2023 to 2028, the 3PL market is estimated to grow from $1.2 trillion to $1.6 trillion[3]. This growth is fuelling demand for logistics real estate, as 3PL providers require extensive warehousing and distribution facilities to manage the increasing volume of goods being moved through global supply chains. In line with these trends, over 70% of our customers at ESR comprise 3PL and e-commerce players.
[1] International Trade Administration, 2024
[2] CBRE The Future of Logistics: The Long-Term Drivers and the Current Market Conditions 2023
[3] DHL Resilience, Responsibility and Robotics: Our Supply Chain Predictions for 2024
Urbanisation and Demographic Shifts
Urbanisation and demographic changes have also contributed to the booming logistics real estate sector. The proportion of global urban population will rise by over 12% from 2020 to 2050, an increase of around 2.3 billion people[4]. Half of these growth will be in APAC. As more people migrate to cities and urban areas expand, there is an increased need for logistics infrastructure to service these densely populated regions.
The growing middle class in emerging markets, particularly in Asia, has fuelled consumer spending and, by extension, the demand for goods and services. McKinsey expects global consumption to increase by $20 trillion between 2020 and 2030, with Asian consumers accounting for half of the growth[5]. This has necessitated the development of new logistics hubs that can efficiently manage the flow of goods within and between urban areas.
[4] UN World Urbanization Prospects 2018
[5] McKinsey Beyond income: Redrawing Asia’s consumer map 2021
Transformation of Logistics Networks to Enhance Supply Chain Resilience
The reconfiguration and strengthening of supply chain networks to mitigate business risks has become a critical focus for businesses in the wake of recent global disruptions. The COVID-19 pandemic, geopolitical tensions, and climate-related events have exposed the vulnerabilities of traditional supply chains, driving companies to rethink and redesign their logistics strategies to ensure continuity and robustness.
To build resilience, companies are incorporating greater flexibility and redundancy into their supply chains. This involves establishing multiple suppliers, alternative transportation routes, and backup distribution centres. Deloitte reported that 57% of industrial manufacturing companies are adopting a “supplier + 1” strategy, which involves incorporating an additional supplier from the same or different location to reduce reliance on a single source[6]. These strategies are driving logistics demand, as companies seek to ensure continuity in case of disruptions.
[6] Deloitte Restructuring the supply base: Prioritizing a resilient, yet efficient supply chain 2024
Desired Property Features Sought by Occupiers
Increasing Importance of Urban and Last Mile Logistics Space
The rise of online shopping has been accompanied by a corresponding rise in customer expectations for fast and reliable delivery services. Consumers are increasingly prioritizing delivery speed over cost, with a 2023 ECDB survey revealing that 48% of shoppers value fast delivery more than the 43% who prioritise lower shipping costs.
Key to achieving these expectations is the strategic placement of warehouses and distribution centres. These facilities are now increasingly situated in proximity to major transportation hubs, such as seaports, highways, airports, and urban areas, optimising efficiency for both domestic and international deliveries. These strategically positioned hubs are essential for ensuring fast and efficient deliveries to the “last mile”, the final, short leg of the journey where goods reach the end-user customer.
Preference for Modern Logistics Facilities
Beyond strategic location optimisation, companies are actively opting for facilities with advanced technologies systems. These systems, such as robotic picking and retrieval systems, aid in optimising efficiency, speed, and overall reliability of delivery and distribution. This heightened demand has reshaped the industry, resulting in increased property values, competitive bidding, and innovative property redevelopment.
In highly urbanised areas where land is scarce, there is also growing trend toward multi-story warehouses. These facilities are vertically built buildings with multiple floors that could be leased independently, with features such as truck ramps and loading docks. While these are not necessarily new, the recent surge in e-commerce has accelerated their adoption. The need for last-mile logistics facilities in densely populated areas, where lands are more costly and limited, has made multi-level logistics a popular logistics type to maximise space efficiency.
At ESR, we develop and lease multi-storey logistics facilities in high-demand markets such as Singapore, Japan, South Korea and Australia. Our projects, such as our award-winning ESR Higashi Ogishima Distribution Centre that incorporates advanced sustainability, human-centric and efficiency features, exemplify our ability to deliver large-scale, innovative solutions that meet the evolving needs of our customers.
Sustainability a Growing Priority
Logistics occupiers are increasingly demanding green assets due to a combination of environmental, economic, and regulatory factors. Sustainability is now at the forefront of many occupiers’ priorities, with many of them having Environmental, Social and Governance (ESG) roadmaps and goals in place.
A recent CBRE survey reveals a growing preference among occupiers for green logistics facilities[7]. Survey respondents highlight energy-related factors, such as renewable energy supply and energy efficiency management, as top priorities. Additionally, occupiers also favour facilities with green certifications and electric vehicle charging infrastructure.
At ESR, we actively integrate sustainable features into our assets. As of 2023, we have installed 112 MW of rooftop solar power capacity and 809 electric vehicle charging stations across our assets globally, as part of our overall decarbonisation efforts. 42.8% of our portfolio of completed, directly managed assets also attained sustainable building certifications and ratings, including LEED, NABERS, CASBEE, and WELL.
[7] CBRE Asia Pacific Leasing Market Sentiment Index June 2024
Why the Evolution of Logistics Real Estate Matters for Institutional Investors
Global secular shifts are reshaping the logistics real estate market, with growing demand for urban and last mile facilities, and an emphasis on sustainable and technologically advanced properties. These changes are driven by the need to meet evolving consumer expectations, optimize delivery times, and address environmental concerns in increasingly populated regions.
Despite economic uncertainty, rising interest rates, and inflationary pressures, prime logistics spaces are weathering the storm with demand staying resilient. Competition for industrial developments, particularly in strategic locations close to major cities, remain strong.
Investors can capitalise on these trends by including logistics assets into their investment portfolios. By strategically allocating capital to logistics real estate, institutional investors can enhance portfolio resilience, capture attractive returns, and contribute to a more sustainable future.
