Location, Not Rent, Is the Top Priority for Industrial Tenants
Price elasticity of rents has declined as tenant shift focus to industrial locations near urban environments with access to population centers.
Location has moved to the top concern for industrial users. New research from Prologis reports that pricing elasticity on rents has declined as location selection becomes increasingly important.
The new trend is two fold. First, rents make up a small cost in the overall supply chain, leaving tenants room for flexibility. Second, urban population growth and changes in consumer expectations, both in online and in-store shopping, has driven user demand near population centers.
Industrial rent makes up only about 5% of the supply chain, and in most cases, strengthening the supply chain will help boost revenue and meet consumer demand. This increase in productivity is generally enough to warrant increased real estate costs, according to the Prologis report. In fact, savings on transportation costs alone could offset increase rents. The report estimates that proximity to population centers has the potential to reduce supply chain costs by 50%. A recent MIT study supports the claim, finding that when industrial facilities are located near population centers, transportation emissions are cut in half compared to out-of-town facilities.
The cost savings and increased efficiency of well-located industrial facilities has reconfigured the real estate algorithm of industrial users to focus on location of real estate pricing. Recent population patterns reinforce the long-term benefits of urban locations. In the last three decades, urban population has doubled, and in the next 30 years, experts expect that it will double again, according to Prologis. As cities embrace density, logistics users are following, creating dense consumption centers that drive revenue and a competitive advantage.
The events of the pandemic only underscore these trends. Industrial was the top performer in 2020, according to Moody’s Analytics. At the end of the year, the asset class had 40 straight quarters of positive net absorption, largely due to increased in online shopping during stay-at-home orders. Moody’s predicts that online commerce will drive a rebound in industrial. As vacancy rates decline steadily over the next five years, effective rents will rise by 1.4% in 2022.