The Future of Logistics: The Long-Term Drivers and the Current Market Conditions

July 20, 2023 25 Minute



The rise of e-commerce; the growth in reverse logistics; the reconfiguration of supply chains, and more recently, the increase in reshoring or near-shoring manufacturing as a result of heightened geopolitical tension and a retreat from globalization are well-established secular growth drivers of logistics real estate. These factors drove logistics vacancy rates to record lows and rents to record highs over the last few years. After such a stellar run and amidst macroeconomic uncertainty in the United States due to increasing interest rates over the last year, where does logistics go from here?

This two-paper series will seek to provide the answers. It’s time to revisit the case for logistics. Paper one will examine the long-term growth dynamics at play, discuss supply and demand, review current positioning in the overall maturation process of the sector and seek to assess whether secular trends will continue to push logistics vacancy rates lower and rent growth higher. Paper two will drill down to the asset level and examine the differentiating factors between modern and legacy logistics facilities. To capitalize on opportunities to maximize returns and minimize risks, investors need to understand the bifurcation occurring in the market.

The long-term drivers


Demand for modern logistics facilities has been growing in lockstep with the rise of e-commerce for over a decade—the more consumers buy online, the more demand there is for high-functioning logistics assets to ensure timely delivery. E-commerce growth has been impressive. In 2015, online sales accounted for 8%, or US$1 trillion, of the US$12.6 trillion global retail market. By 2020, the value of online transactions soared 140% to US$2.4 trillion. Yet despite this growth, e-commerce only accounted for 18% of the US$13.5 trillion global retail market in 2020 (source: Euromonitor).

While e-commerce growth slowed from its pandemic highs as people returned to shopping in person and pulled back on discretionary spending, e-commerce activity as a percentage of non-auto or gas sales remained around 22%, down only slightly from Q2 2020 when pandemic induced lockdowns prevented or discouraged in-person shopping. Over the long-term, e-commerce is expected to increase its share of total retail sales. CBRE Research projects that e-commerce penetration rates in the U.S. will rise from their current 22% level to just over 33% over the next ten years. And when compared to penetration rates seen in other countries, notably South Korea, Indonesia, Mainland China, the U.K. and the Netherlands, the U.S. still has considerable room to rise further. Additional e-commerce adoption will require large amounts of logistics space. CBRE Research projects that for every $1 billion of additional e-commerce sales, an additional 1 million sq. ft. of logistics space is required. The e-commerce tailwind behind modern logistics markets looks set to continue.

Reverse logistics

E-commerce is not the only long-term driver of logistics demand. Reverse logistics, centered around the movement of goods from customers back to sellers or manufacturers, is another—it is estimated that 8%-10% of all brick-and-mortar retail sales throughout the year are returned, while e-commerce return rates are up to 30%. Many retailers, especially those with thin supply-chain networks, use third-party logistics providers (3PLs) to manage returns given the complexity of reverse logistics and to free up premium space for forward logistics. As e-commerce grows, we expect demand for reverse logistics and 3PL solutions to grow as well.

3PLs already have the largest share of the leasing market—as of Q1 2023, this stood at 31.3%. CBRE Research anticipates that 3PL market share will grow to 37% by year-end 2023 as more retailers outsource their logistics needs, particularly for reverse logistics activities given low vacancy rates and record high rents in major markets. Reverse logistics, therefore, is a second tailwind fueling logistics demand.

Supply-chain reconfiguration

The industry is moving from a just-in-time to just-in-case approach. Just-in-case strategies, centered around holding more inventory to protect against unforeseen supply chain shocks, are increasingly being favored at the expense of incumbent just-in-time models which could not keep up with consumer demand during the pandemic. As the Global Financial Crisis (GFC) stress-tested large money-center banks, COVID-19 served as an existential shock to retailers’ revenue and overall market share. A deep diagnostic assessment found that the global supply chain failed and the system needed a robust and resilient supply chain strategy. Increasing consumer demand and expectations of faster delivery times is continuing to put pressure on supply chains. Same-day or next-day delivery is becoming the default expectation, especially among urban Americans who order goods online. There’s a clear commercial benefit to meeting heightened customer expectations—PwC found that 41% of consumers are willing to pay a charge for same-day delivery, while nearly a quarter of shoppers (24%) said they would pay more to receive packages within a one- or two-hour window of their choosing. Businesses need to meet the demand for fast delivery to retain their customers. A 2019 consumer survey (Panko, 2019) found that 45% of shoppers were unlikely to order from a business again if the parcel arrived late.

The clear takeaway for sellers and manufacturers is the critical need to accumulate safety stock or excess inventory in locations close to their end-users to minimize potential disruptions. Accumulating stock takes time. As seen in the graphic below, U.S. retailer inventory-to-sales ratios dropped as low as 1.1x during the COVID-19 pandemic. Retailers are still working on rebuilding inventory-to-sales ratios to the long-term average. Additional restocking on top of the long-term average to one closer to 1.5x-1.6x would be needed to accommodate just-in-case strategies. Some estimates suggest that 800 million square feet of additional logistics space will be needed to house the safety stock that occupiers will need to build supply chain resilience.


Figure 1_Formated

Sources: Inventory to Sales Ratio from the St Louis Federal Reserve as of Mar 2023 and the GSCPI from the New York Federal Reserve as of May 2023. Note the Index is scaled by its standard deviation.

Supply chain reconfiguration, therefore, is expected to continue to drive demand for modern logistics real estate.


Closely related to the supply chain reconfiguration theme, supply-chain disruption, increased shipping rates and geopolitical uncertainty caused by Russia’s invasion of Ukraine are fueling a trend of manufacturing reshoring or near-shoring, as evidenced by the fact that Bank of America analysts noted that mentions of reshoring were up 128% year-over-year in an analysis of S&P 500 Q1 earnings call transcripts. Manufacturers from around the world are moving production and assembly to Mexico as they seek proximity to the U.S. markets as part of a broader shift in global trade. Amidst macroeconomic uncertainty and de-globalization, China’s labor has become quite expensive and factory activity in China decreased in April and May 2023.1 The increased interest in reshoring and/or near-shoring has also been driven by encouragement from the U.S. government. The Inflation Reduction Act, signed by President Joe Biden in August 2022, places an emphasis on incentives for regional production as part of its plans to fortify supply chains and bolster U.S. manufacturing, particularly for EV auto manufacturer and battery suppliers, which receive tax credits under the Act and have recently seen an increase in overall logistics leasing activity.

While e-commerce, supply chain reconfiguration, reverse logistics, and near-shoring and reshoring have all contributed to the booming demand for logistics assets over the past few years, they should not be thought of independently. Rather, their combined growth and contribution to the demand for logistics assets is very much intertwined. For example, as mentioned above, the Inflation Reduction Act is contributing to shoring up supply chains in the United States while also promoting the growth of EV trucks. The growth in EV trucks and autonomous trucking in the more distant future will impact supply chains and contribute to lower delivery costs of consumer goods, which in turn will precipitate an increase in both e-commerce sales and the need for growing reverse logistics supply chains, creating a positive feedback loop that is expected to drive a strong logistics sector for the foreseeable future.

One side of the equation

We have seen that the long-term dynamics that powered the logistics sector in recent years are still powering the demand equation for logistics assets, which is expected to remain elevated, particularly for modern assets in infill locations within primary, coastal markets. Demand is of course just one side of the equation. Having multiple growth levers in place is positive, but not if supply outpaces demand and erodes future returns.

Taking the temperature of today’s logistics markets

Strong occupier demand for logistics real estate has led to historically low vacancy rates and robust rental growth over the past few years. Despite record breaking logistics completions in Q1 2023, the overall industrial vacancy rate is still 50-100 basis points lower than the 10-year average of 5%. The graph below shows how vacancy rates across the logistics space have compressed in recent years.

Figure 2_v2_Formated

Source: CoStar, as of June 2023; CBRE Investment Management.

2022 was the second-best year on record in terms of industrial leasing activity with total leasing activity (new and renewals) topping 866 million square feet driven mostly by demand in the 1,000,000+ sq. ft. range. Leasing activity has slowed year to date in 2023 as economic uncertainty resulted in many larger logistics occupiers taking a wait and see approach before leasing large swaths of space. Leasing activity in the 300,000-699,999 sq. ft. range and leases over 1.2 million sq. ft. are both down 30% year-over-year as of May 2023. However, even with decreased activity for larger spaces, logistics leasing activity remains on pace for the third best year on record with a projected 725 million sq. ft. of leasing activity per CBRE Research. Additionally, in Q2 2023, in excess of 30% of all quarterly leasing activity were existing lease renewals. Since Q1 2021, the only other quarter that renewals as a percentage of overall leasing activity exceeded 30% was Q4 2022. Occupiers are actively choosing to renew at rates that are on average 32% higher than market rates due to low vacancy rates in core markets. This phenomenon also suggests that there are few viable logistics facilities to meet their needs, they want to lock in rents before they get higher, for certainty in an environment of economic uncertainty and to protect their labor force by staying in the same location. Subleasing activity has increased year-over-year in part because taking rents (actual, initial base rent in a lease agreement) have grown 67% over the last few years. However, the amount of space available for sublease represents less than 1% of the nation’s total industrial inventory. As such, net absorption is expected to remain positive for the 13th consecutive year. At the current time, new supply of space has not outpaced demand.

The new normal

While 2023 transaction volumes are expected to be lower than the record highs of 2021 and 2022, they are still projected to be 37% higher than 2017-2019 levels.2 With demand for logistics assets set to remain high for the foreseeable future, CBRE expects today’s elevated transaction volumes will become the new normal. This new normal will be driven by a diverse set of companies looking to expand either through the utilization of multiple ports of entry or the expansion of manufacturing in North America to service growing online consumption, better protect inventory levels and assist in the diversification of product sourcing.

CBRE’s new normal, however, comes at a time when new construction starts have rapidly slowed from periods of record completions due to barriers such as elevated cost of capital and municipal opposition. As of Q1 2023, new construction starts are down over 16% from the previous 5-year quarterly average and down over 41% year-over-year due to economic uncertainty, tighter credit, and local municipalities. Municipalities within the Inland Empire, one of the most important logistics distribution markets in the world, as an example, imposed development moratoriums. Additionally, access to utilities, such as water and electric has become more challenging. For example, Arizona recently announced that it plans to limit new construction, particularly in the Phoenix metropolitan area, a market that has seen a lot of development activity over the last few years, given groundwater supply concerns. Availability will, therefore, likely remain well below the long-run average which should support double-digit rent growth in selected markets, particularly in land-constrained and emerging markets with strong population growth. Even with asking rents rising 20% year-over-year nationally last year, the strong rent profile for logistics is set to continue. Midway through 2023, the logistics market is still on pace to deliver double digit rent growth this year.

The ingredients are in place

With long-term structural tailwinds driving demand and supply, which are struggling to keep pace, the ingredients appear to exist for today’s low industrial vacancy rates, strong rent levels and elevated capital values to persist for years to come.

However, there’s one caveat, which Paper 2 will delve into. Occupiers are under pressure to be more selective in the properties they lease. The logistics growth story is entering a new phase, one in which the investor return profile will likely depend on the type of asset held. 

1 Reshoring: More domestic manufacturing due to supply chain disruption (
2 CBRE Research Q4 2022

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