More people are shopping online because it is easier and more convenient. It makes for a more competitive and fast-moving battleground for retailers and increases disruption among real estate markets. The move to online shopping has a negative effect on our high streets but is having a positive effect on industrial buildings that deal with logistics.
The industrial real estate sector has changed significantly over the past 10 years. The increased demand has been driven by traditional retailers, re-shaping their supply chains; third-party logistics companies and the rise of e-commerce operators. Amazon has dominated UK logistics take-up in recent years as it seeks to build capacity into its supply chain. This surge in demand has driven commercial real estate performance globally and industrial property outperformed the all-property benchmark in most regions in 2016.
As more institutionalised investors begin investing, prices increased, driving capital growth. Out of the 30 global markets measured by MSCI in 2016, 18 of them showed industrial assets had the strongest income returns. Landlords have pushed rents higher because vacancy levels in industrial real estate are close to historic low levels. In the USA, logistics has had the strongest rental growth of any US property type for 15 quarters in a row.
E-commerce is still a fraction of retail sales globally but growth far exceeds the rest of retail. Distributing directly to an internet consumer is much less efficient that delivering to a bricks and mortar store and requires twice as much space for a given amount of sales. As e-commerce eats away at other retail sales, there is an increased demand for industrial space.
It is estimated that about 10% of industrial space globally is dedicated to e-commerce, so there is plenty of room to grow.
With more people living in densely populated areas in and around cities, the concept of the sharing economy may result in urban consolidation centres – logistics facilities situated close to the areas they serve. These types of initiatives indicate that the demand for logistics is unlikely to diminish soon, although the methods of delivery will change.