E-commerce and the Future of Retail, Delivered by Logistics Real Estate

The bottom line: Following our May 11 webinar on the outlook for logistics real estate, we have continued to field questions about our assumptions for demand. In this piece, Prologis Research re-examines the components of our demand outlook.

Key findings:

1. We’re holding our 2022 demand forecast.
2. E-commerce is in a new—and expected—phase of growth.
3. Demand for e-commerce continues to diversify.

A common question involves a partial spending rotation from goods to services, online to in-store. This is temporary and we have been expecting this to occur, which means we’re not changing our stated view on demand. We are watchful on rising levels of consumer stress and modeled -5% real growth in retail goods sales in our Q1 2022 earnings call. We estimate that the market is experiencing more than 800 million square feet (MSF) of pent-up incremental demand even with this pullback. But, in 2022, only 375 MSF will come online to meet this demand. The constraints on capacity remain clear. Given this, our current forecast points to 360 MSF of net absorption resulting in year-end vacancy of 3.3%—less than half the low from the prior cycle. Correspondingly, logistics rents in the U.S. have risen in line with our forecast of 22% for 2022, consistent with an historic low True Months of Supply.™

The future of retail is a further shift to e-commerce. These factors will keep upward pressure on the e-commerce penetration rate:

1. Consumers like what e-commerce offers: convenience and choice. Over the 2021 holiday shopping season, the proportion of consumers using same- or next-day delivery held steady. To contrast: People who bought goods online and then drove to the store to pick up their purchases decreased compared to 2020.¹
2. The buildout of supply chains fosters a more uniform and higher service level, which in turn attracts sales. More than 90% of consumers expect delivery in three days or less; 30% expect same day.² About 85% of online shoppers will shop elsewhere if delivery times are too long.³
3. The pandemic put many physical stores out of business. Consumers don’t have as many retail options close to home anymore. According to Coresight Research, net U.S. store closings totaled nearly 6,200 from 2020 to 2021.

MARCH 10, 2020 – Covid 19 Special Report – Implications for Logistics Real Estate
“…this opportunity could be short-lived as some customers race to gain lost ground and expand their needs for facilities in support of business continuity and higher service levels.”

APRIL 6, 2020 – Business Update Conference Call
“There is going to be a surge of this stuff and then there’s going to be a lull of this stuff, and then it’s going to stabilize at the higher level, because of the penetration of e-comm and more safety stock.”

SEPTEMBER 10, 2020 – Evercore ISI 2020 Real Estate Conference
“We’ll give some of this e-commerce stuff back temporarily and then we build off of that basis. I don’t expect it to continue surging from these peak levels. But I think it has legs and will continue in a major way.”

JANUARY 6, 2021 – Prologis Q4 2020 Earnings Conference Call
“Initially, obviously, we’ve had a clear market leader, which is Amazon in excess of 40% of the total volume, but we’re seeing breadth in terms of different e-tailers that are now growing their businesses and have found their footing. So, I think we’re in very early stages.”

JULY 19, 2021 – Prologis Q2 2021 Earnings Conference Call
“While Amazon remains steady at 6% of total new leasing, we have seen many more e-commerce players come to the table. For example, we signed 168 new e-commerce leases in the first half of 2021 versus 53 in the first half of last year.”

OCTOBER 27, 2021 – Prologis Breaking New Ground 2021
“I actually think it is going to get worse, because a lot of people already talking about the logjam over Christmas are going to experience it… The short-term problem, I think, is going to be with us through 2023… the world is getting less and less predictable.”

APRIL 19, 2022 – Prologis Q1 2022 Earnings Conference Call
“I expect the percentage of online sales to temporarily step back a bit before it gets back on a growth curve of ever increasing penetration levels. And I also believe that the expenditures are going to shift more to experiences than goods like they have been in the last two, three years.”

Endnotes

1. https://www2.deloitte.com/content/dam/insights/articles/us164630_2021-holiday-retail-survey/DI_2021-Deloitte-holiday-retail-survey.pdf
2. https://www.mckinsey.com/~/media/McKinsey/Industries/Retail/Our%20Insights/retail%20speaks%20seven%20imperatives%20for%20the%20industry/retail-speaks-full-report.pdf
3. https://d1n9pjnquucpl9.cloudfront.net/pdfs/2021_Flexe_Omnichannel_Retail_Report_COVID.pdf
4. Coresight Research
5. Euromonitor, Prologis Research, 10-K filings
6. Amazon as a proportion of top 50 US logistics markets; source: 10-K filings, CBRE, Colliers, Cushman & Wakefield, JLL, Prologis Research
7. Euromonitor, U.S. Census Bureau

Forward-Looking Statements

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security. We are not soliciting any action based on this material. It is for the general information of customers of Prologis.

This report is based, in part, on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. No representation is given with respect to the accuracy or completeness of the information herein. Opinions expressed are our current opinions as of the date appearing on this report only. Prologis disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report.

Any estimates, projections or predictions given in this report are intended to be forward-looking statements. Although we believe that the expectations in such forward-looking statements are reasonable, we can give no assurance that any forward-looking statements will prove to be correct. Such estimates are subject to actual known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in our expectations or any change in circumstances upon which such statement is based.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Prologis.

About Prologis Research

Prologis’ Research department studies fundamental and investment trends and Prologis’ customers’ needs to assist in identifying opportunities and avoiding risk across four continents. The team contributes to investment decisions and long-term strategic initiatives, in addition to publishing white papers and other research reports. Prologis publishes research on the market dynamics impacting Prologis’ customers’ businesses, including global supply chain issues and developments in the logistics and real estate industries. Prologis’ dedicated research team works collaboratively with all company departments to help guide Prologis’ market entry, expansion, acquisition and development strategies.

About Prologis

Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of March 31, 2022, the company owned or had investments in, on a wholly owned basis or through coinvestment ventures, properties and development projects expected to total approximately 1.0 billion square feet (93 million square meters) in 19 countries.

Prologis leases modern logistics facilities to a diverse base of approximately 5,800 customers principally across two major categories: business-to-business and retail/online fulfillment.