Prologis Research: higher inventories needed to protect vulnerable supply chain

What is the current state of logistics real estate in the Netherlands and what can we expect in 2022? Eva van der Pluijm-Kok, Director Research & Strategy at Prologis, expects demand for logistics real estate to continue to grow in the coming year and that higher inventories will be needed to protect the supply chain from disruptions. There are also other challenges in the sector, such as land and labor shortages. 

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Young market and e-commerce create structural demand

What is the current state of logistics real estate in the Netherlands? ''In the Netherlands, there is a structural demand for logistics real estate,'' Eva begins. ''Many people don't realize that logistics real estate in Europe is a very young sector. It was not until the early 2000s that the development of a pan-European distribution network began requiring modern logistics real estate,'' says Eva. ''There is an increasing structural demand because the market is young, but also because of strongly growing e-commerce. For every euro sold online, a customer uses three times more logistics space. Online sales were not only higher during the pandemic, this growth is structural (Figure 1). As a result, the demand for logistics real estate in the Netherlands continues to rise structurally (Figure 2).''

Figure 1: Online sales (index 2015=100, deflated turnover.
Source: Eurostat, Prologis Research

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Figure 2: Logistics demand vs. BNP, Netherlands (occupied stock, index=2007)
Source: CBRE, JLL, C&W, Fraunhofer, Gerald Eve, Colliers, Eurostat, Prologis Research

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Higher inventories to protect vulnerable supply chain

''The logistics chain has been made as efficient as possible over the years,'' Eva explains. ''But that makes it vulnerable at the same time. We saw this in 2021, for example, with the blockage of the Suez Canal, but also during the pandemic when there was suddenly no toilet paper left on the shelves. Although the pandemic is temporary, disruptions in the supply chain are inevitable, and a single disruption in a very efficient supply chain can have major consequences.''

''Customers see that the cost of additional inventory is less than the revenue they miss by not having enough in stock.''

How are companies anticipating this? ''Customers are becoming increasingly aware of supply chain disruptions. They see that the additional cost of extra inventory is lower than the revenue they miss by not having enough in stock. Therefore, for a more stable supply chain, the demand for additional inventory will increase,'' Eva expects. ''We are already seeing in the US and in the UK that customers are increasing their inventories by 5-10%. This trend is also expected to continue in Europe and the Netherlands.''

Low vacancy rates, labor shortage and impact on rents

So demand will continue to grow in 2022 because of the young market, growing e-commerce and to protect the supply chain from vulnerabilities. But there are also challenges at play. ''Vacancy rates in Europe and the Netherlands are historically low. If there is no available real estate and it is becoming increasingly difficult to obtain land, then it becomes difficult to meet this demand,'' says Eva.

''In addition to a shortage of land, we currently have the lowest unemployment rates ever in Europe. Staff shortages were significant even before COVID. These shortages are not only in healthcare and hospitality, but also in logistics. That ranges from workers in warehouses to truck drivers. Due to the many manual processes, e-fulfilment is a labour-intensive process. For example, packages are sent to individuals, instead of whole pallets to shops. An increase in online purchases will therefore also affect the number of people needed in distribution centers to meet this demand,'' Eva continues. ''In addition, we expect an impact on rental prices of logistics real estate in the Netherlands in the coming years. In the Netherlands, rental prices, adjusted for inflation, are still below the 2007 level. These have therefore not yet developed along with the structural demand.''

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