Prologis deal highlights demand for warehouses

As more customers shop online with faster delivery-time expectations, logistics providers are racing to acquire industrial facilities.

November 05, 2019
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Another large industrial real estate deal has underscored the ever-growing demand for warehouse facilities as more shoppers move online.

Industrial real estate firm Prologis Inc. recently agreed to acquire its rival, Liberty Property Trust, in a US$12.6 billion deal. It was the company’s third acquisition in the past 18 months.

It was also the second mega-deal of 2019 for the sector, coming just four months after Blackstone Group LP bought a portfolio of U.S. industrial assets in the biggest private commercial real estate transaction in history.

Prologis is driving to create a portfolio of upwards of 1 billion square feet in the U.S. Its buying spree highlights how e-commerce-driven demand for industrial space has logistics providers racing to create massive scale around the globe, says Craig Meyer, President of Industrial for JLL.

The quickest way to acquire them at scale is through M&A, he says.

“The benefit beyond operational leverage is the ability to satisfy large customer needs, both within and across key logistics markets,” Meyer says of the Prologis deal, which includes warehouses in Southern California, Houston, Chicago, Atlanta and Pennsylvania’s Lehigh Valley. “Very few, if any, landlords have the scale to do that. It creates a huge advantage.”

Logistics in demand

The vacancy rate for logistics properties is “the lowest it’s ever been, and it’s been consistently low,” Meyer says.

Industrial vacancy sat at 4.9 percent in the third quarter, down 10 bps from 5 percent in the previous quarter, according to JLL Research.

Most of the demand for space is fueled by e-commerce, which necessitates fulfillment centers. And that demand is only projected to grow.

In 2018, online sales comprised 10 percent of overall sales and that number is expected to grow to upwards of 30 percent over the next 10 years, Meyer says.

The rise of e-commerce has greatly changed how many warehouses are needed, and where they are located. In the traditional model, packages flowed into major cities from far-flung suburban warehouses. That setup sufficed – until online shopping changed consumer expectations. In 2017, 46 percent of consumers expected the possibility of next-day delivery when making purchases — up 3 percentage points from the previous year, according to the UPS Pulse of the Online Shopper study. Same-day service was expected by 20 percent of consumers, up 4 percentage points.

“This has profound impact on industrial real estate and is a driver of all demand,” he says. “As customer delivery requirement increase, demand for logistics facilities is pushed deeper into cities.”

For landlords like Prologis and Blackstone, it’s all about creating scale to be able to offer clients what they need to grow. Prologis now has facilities on the perimeter of cities, and within key infill fulfillment markets, and will capture demand as these customer service requirements continue to grow.

“There’s a race on to acquire logistics spaces, and I can’t see that ending anytime soon,” he says.