Real Estate

The Shortest Road to Riches

By James Maydew
BSc (Hons), MRICS Head of Global Listed Real Estate Sydney, Australia

Key points


Consumer expectations of instant gratification are driving down delivery times


Labour shortages and traffic congestion highlight the criticality of well-located logistics facilities


Rental costs are being pushed up - but rent is a small part of total logistics supply chain costs


New opportunities for rental growth are emerging as logistics real estate grabs a larger slice of the supply chain pie

“Lost time is never found again” - Benjamin Franklin (1706-1790)

Franklin was possibly an early visionary of our willingness to pay a premium for the convenience of home delivery.

Yet the surge in online shopping comes at a time of near full employment in certain markets, increasing urban congestion and expectations of shorter delivery times.

The importance of ‘time to market’ makes supply chain efficiency a hot topic as businesses focus on their proximity to B2B and B2C customers.

This is dramatically transforming the demand for logistics real estate in highly urbanized locations, creating interesting opportunities for investors in global logistics real estate.

Delivery time expectations within the e-commerce experience have fallen sharply. Delivery periods measured in weekly units were once the norm, but this is no longer acceptable in the era of Amazon’s next-day delivery service.

Once customers have experienced next day or even same day delivery, let alone Amazon’s ‘Prime Now’ within the hour delivery, it’s almost impossible to go back to anything less. The importance of time is now also impacting the B2B logistics market where commitments to two-day delivery are becoming increasingly common.

This is leading to a greater focus on the role of supply chain management within logistics companies. At a strategic level this means managing the total cost of the logistics supply chain whilst minimizing delivery times.

Despite e-commerce fulfillment requiring approximately three times the floor space of bricks and mortar retailers, rent represents just a small part of the logistics supply chain total costs.

The biggest single expense is transportation; this is a particular pain point for the industry as transportation costs are rising. The US trucking company JB Hunt expects a 10% increase in trucking costs over the next year which will flow through to rising parcel rates; however longer term, these will ultimately fall as automation reduces costs.

Although trucking is a huge employer in the US, with approximately 3.5 million professional truck drivers, according to the American Trucking Association, a driver shortage is the main factor behind this cost pressure. High training fees relative to expected earnings and concerns around career longevity in a world of vehicle automation constrain the numbers entering the trade. The US was short of 50,000 drivers at the end of 2017 according to the American Trucking Association, despite recent pay increases and sign-on bonuses.

Given labour is a significant supply chain cost at around 10% of total costs according to JLL, it is the availability of workers that represents the key challenge. Unemployment is at record lows in a number of major markets; in the US it reached 3.9% in July 2018 according to the Bureau of Labor Statistics – close to its lowest level since April 2000.

The decline in retail employment has been well documented, having fallen by some 140,000 in the US over the last decade. However warehouse jobs have more than offset this decline, rising by some 400,000, according to estimates by the Progressive Policy Institute. The impact is even more acute during the December holiday season when labour is in particularly high demand.

The bulk of the supply chain costs are attributable to logistics expenses; transportation, inventory and labour comprise up to around 80% of the total. In comparison the rental cost may well be less than 5% of supply chain costs, according to JLL. This has major implications for the location and quality requirements of logistics real estate.

Figure 1: Breakdown of the Logistics Supply Chain Costs

Source: JLL
Source: JLL

Higher transportation costs, the availability/cost of labour and the need for fast delivery to customers are all driving logistics businesses to locate distribution centres close to growing population centres. Land costs usually increase as the proximity to cities rises, however this must be understood within the overall cost drivers of the tenant’s logistics business.

The value proposition of logistics real estate in markets characterised by labour shortages, such as the US and Japan, should support the attraction and retention of suitable labour. Logistics clients are demanding more ‘human centric’ design in the distribution centres that they lease. This includes staff dining areas, fitness centres and even child care facilities – concepts that were previously restricted to CBD office assets.

Incorporating such facilities into distribution centre design obviously pushes costs upwards, however tenants are mindful of how the benefits enjoyed by staff can advantageously impact salary and recruitment costs.

In the long-term it may well be that labour and transport costs begin to decline in importance as warehouse automation increases and electric/automated delivery trucks start to be introduced. However, servicing the end-customer will remain the key driver of success for the providers of logistics real estate.

 A separate but more immediate challenge in this market is that most distribution networks are complex, but have evolved over time based upon short-term growth needs and acquisition activity. This often rather un-strategic development path can lead to significant supply chain inefficiencies.This often provides an opportunity for logistics real estate owners to collaborate with tenant businesses to optimize their distribution strategy. This typically gives rise to savings of 5% – 12% of the total supply chain costs.

We anticipate that e-commerce growth will continue to accelerate globally while traditional retailers focus on improving the efficiency of their supply chains. This combined effect will continue to push up demand further for well-located logistics facilities.

Figure 2: US Logistics Market Completions, Net Absorptions and Vacancy Rate

Source: CBRE, JLL, Gerald Eve, Cushman & Wakefield, Colliers, Prologis Research
Source: CBRE, JLL, Gerald Eve, Cushman & Wakefield, Colliers, Prologis Research

This is currently reflected in vacancy rates, which in the US especially are now at all-time lows, and rental growth projections for well-located logistics facilities. Institutional investors are increasing their exposure to logistics real estate as they seek to capture value from its exciting growth path.

It is expected that online shoppers’ rising service expectations, traffic congestion, freight costs and labour shortages are trends that will endure. Therefore investors should seek to identify those companies that are focusing on highly efficient logistics assets closer to growing populations.  

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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