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Warehouses are the next HOT investment triggered by the digital transformation of the supply chain

A recent article in Bloomberg suggests that warehouses are now becoming one of the hottest investments in the market, based on recent moves by the Blackstone Group LP, who are betting $18.7 billion on the shift towards e-commerce.  This is a perfect example of how the physics of supply chains, which are often overlooked, are fundamental to understanding and enabling the “digital transformation” that is discussed so often in the press.

The rise of Amazon and other e-commerce companies has increased the need for warehouse space by retailers seeking to expand their digital operations and cut delivery times. The shift toward online shopping is reconfiguring supply chains and shaping the fortunes of industrial landlords, with demand especially high in and around large cities, where e-commerce has taken off fastest.  Online shopping in the U.S. is climbing. Retail e-commerce sales for the first quarter totaled $137.7 billion, an increase of 3.6% from the last three months of 2018, U.S. Department of Commerce data released in May showed. Total retail sales, meanwhile, were estimated at $1.34 trillion, virtually unchanged.

So the economic cascade driven by the need for last mile, same day delivery, is now underway.  Bloomberg, an investment manager is paying for 179 million square feet of urban logistics properties — the warehouses used by Inc. and other retailers to fulfill orders from online shoppers. The deal with Singapore’s GLP Pte, the second-largest owner of U.S. logistics real estate, will almost double Blackstone’s U.S. industrial footprint.  “Logistics is our highest conviction global investment theme today, and we look forward to building on our existing portfolio to meet the growing e-commerce demand,” Ken Caplan, the global co-head of Blackstone Real Estate, said in a statement late Sunday.  

Blackstone Real Estate’s global opportunistic BREP strategy will acquire 115 million square feet for $13.4 billion, while its income-oriented unlisted Blackstone Real Estate Income Trust will purchase 64 million square feet for $5.3 billion, according to Sunday’s statement. The properties being acquired by BREP are in high-growth markets such as the San Francisco Bay and Los Angeles areas, Seattle, Miami, New Jersey and Portland, Oregon, according to a person with knowledge of the deal. Those being purchased by BREIT are in the Dallas-Fort Worth area, Chicago, central Pennsylvania, Atlanta and south and central Florida, said the person, who asked not to be identified because the information isn’t public.

So what is the takeaway from this news?  Several key points emerge here.  First, and perhaps most obviously, is the fact that the physics of supply chain dictate that despite the move to same-day delivery that people use on their cell phones, you still need physical assets in the supply chain to enable these capabilities.  Most importantly, you need to position material on the shelf, in assortments that are aligned with what customers are demanding.  And this shelf space needs to be close enough to customers that they can be picked, packed, and delivered in less than 24 hours.  As noted in a prior blog, this means that warehouse and distribution centers will need to be more plentiful, and closer to customers.  In the past, companies typically used a single national distribution center, with a 3 day BIC delivery time, and 5 day average shipment time.  In 2014, many supply chains move to a two DC model, one in the West, and one in East, which facilitated a two day delivery window.  The future supply chain network is moving towards a metro orientation, with consumer proximity, to accommodate Amazon delivery in 1-4 hours, small pickup lot sizes, short haul, same-day or next day delivery, combined with new and emerging delivery models.  This is driving a lot of change in industry infrastructure, and investors like Bloomberg are getting ahead of it.

The trend also suggests that this is not going to be an easy trend to accommodate.  More deliveries means more vehicles on the road delivering to more locations, which will clash with the laws around vehicles traveling in major cities.  Not surprisingly, there is also a rush to bicycle delivery firms like Deliveroo and Uber Eats, who may become more likely to deliver Amazon packages than food in the future!