Season 3, Post 32: “Everyone’s hair is on fire”
Lockdown may have ended in the UK and all shops have reopened, but still the doorbell continues to ring regularly at your author’s house. The deliveries keep coming thick and fast. Empty packaging boxes quickly fill the recycling bin. As we first discussed last year, once the digital Rubicon has been crossed, there’s no turning back. The speed and convenience of online retail is indisputable, but how many expectant customers ever turn a thought to the complexity of delivery logistics?
Assuming that your desired goods are able to make it into the country (given the current shortage of container ships and related port congestion issues), they are still likely to spend time in several warehouses before reaching your front door. ‘Big boxes’ may not be glamorous, but they are integral to the functioning of the economy. To provide some context, Prologis, the market leader in the field with some 4700 buildings, estimates that around 2.5% of the world’s GDP passes through its warehouses annually. The largest of these may be 1m square feet (or over 20 football pitches) in size. Meanwhile, ‘last touch’ warehouses – often in city centres – are generally at least a fifth smaller.
The commonality across all big box assets is that demand is vastly outstripping supply. This is a function not just of the paradigm shift towards online retail (which requires more warehouse space than bricks and mortar), but also since the pandemic, all retailers are now seeking to establish more robust inventory levels in case of unforeseen events. It also explains why Prologis noted on its recent earnings call that “everyone’s hair is on fire trying to keep up with demand.” The supply chain is “dry”, hence the company’s ability to push through pricing increases for its current assets. This trend is also being replicated elsewhere across the industry.
Warehouses have become cool again then, it seems. Many have sought to join the party. Blackstone, for example, has now built up a $100bn logistics property portfolio. Joe Baratta, who heads its private equity business, justifies the rationale, highlighting “we’re trying to buy things that have their own, isolated growth trends, that are sort of inexorable and disconnected from nominal GDP.” We concur. Amazon – despite being the largest customer of Prologis – also signalled on its last earnings call that 2021 was gearing up to be another big fulfilment centre build-out period. This follows on the heels of 50% square footage growth in 2020.
Good luck finding new land. It can often take up to five years to get entitlements granted for new builds, according to Prologis. Next time you’re driving along the motorway (or similar) spare a thought for that humble warehouse you might spot. Without it, your online retail experience might not be quite the same.
The Future Trends Blog is taking a late summer break next week and will return around the start of September.
19 August 2021
The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in Prologis. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
Alex Gunz, Fund Manager
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