March 13, 2020
The extent of the risks to economic growth posed by the novel coronavirus disease 2019 (COVID-19), and by extension the risks to commercial real estate, is unknown at this point. Yet even as supply chains face disruption in the near term, in the longer term Prologis sees positive implications for the resiliency of logistics real estate.
“COVID-19 has become a catalyst for many to find workarounds that could become permanent, leading to lower demand in certain property sectors (e.g., telecommuting/office, e-commerce/retail),” according to a report from San Francisco-based Prologis. “This volatility could translate to higher demand for logistics real estate (inventories, e-commerce, industry 4.0).”
In the current climate of global uncertainty, Prologis sees three supply chain trends that could boost demand for logistics real estate in the long run:
• Rising inventory levels. “By design, supply chains minimize inventories to distribute goods at low cost,” says Prologis. “They don’t tolerate volatility, which leads to lost sales and revenues.
“In the past, events such as natural disasters and work stoppages at ports have led to step changes in inventory practices. In the wake of COVID-19, customers are likely to reassess ideal inventory volumes and business continuity plans—which could translate to greater demand.
• Continued e-commerce adoption. The current expansion has been characterized by the emergence of online shopping, which grew by 16.7% wordwide in 2019. “COVID-19 doesn’t seem likely to change any of that; instead, it may increase the speed of adoption and the number of consumers who shop online,” Prologis says. “Given its value proposition, especially in the hardest-hit markets, e-commerce may rise in even greater importance in the basic functioning of everyday life.”
• Diversifying manufacturing locations. “COVID-19 may accelerate another structural trend: pushing manufacturing to new locations. Aided by industry 4.0 trends that boost productivity, manufacturers have been evolving their global supply chain strategies, increasingly emphasizing near-adjacent locations (e.g., Mexico, CEE) alongside reshoring.
“Strategies that focus on the consumption end of supply chains will not be affected by these trends. While production-end locations alone are not a major investment strategy, this broadening of manufacturers creates second-order demand through both suppliers and networks that serve blossoming consumer markets.
For comments, questions or concerns, please contact Paul Bubny