Logistics becomes shining star of investing during virus crisis

Updated with correction

Logistics is standing out as a resilient investment during a global pandemic, an important attribute for many institutional investors as they re-evaluate their real asset and real estate portfolios.

Logistics straddles both infrastructure and real estate, and in real estate it is known as the industrial sector.

Along with digital infrastructure and renewable infrastructure, many investors were interested in logistics before the start of the pandemic, said Lisa Bacon, San Diego-based principal, private markets consultant and infrastructure program lead for Meketa Investment Group. During the COVID-19 crisis, logistics has been among the top-performing asset segments.

Industrial was the highest returning sector of any of the main real estate sectors with 11.78% in 2020, far more than the second best performing segment, apartments that produced 1.83% in the 12 months ended Dec. 31, the latest NCREIF Property Index shows. Office returned 1.57%, retail was down -7.48% and hotels were -25.56% .

"Most of the investors I deal with already had this type of investment … and so they are glad they have it and want more of it," Ms. Bacon said.

Any investor that didn't have any exposure to logistics is very interested in adding it to their portfolios, she said.

A year or two ago, some infrastructure managers began investing in logistics, including containers, shipping, trucking facilities and cold-chain facilities needed to transport items that need to be kept chilled.

Managers considered those types of assets a better value than traditional infrastructure such as roads and airports, Ms. Bacon said. Managers that made substantial investments in the space did well pre-COVID and during COVID they proved resilient despite a dip in demand when the supply chain was disrupted, she said.

What's more, the race to develop and distribute vaccines caused prices for logistics assets to increase during the pandemic, Ms. Bacon said.

"I would expect things in that sector are fairly valued, if not at a premium," Ms. Bacon said.

Real estate investors are also looking re-evaluate other parts of their real asset portfolios and exposure to such traditional property types as office, retail and hospitality in light of uncertainty surrounding tenant occupancy, rent collection and cash flow in those real estate sector, said Christy Loop, Atlanta-based director, investments and portfolio manager at Willis Towers Watson PLC.

Due to this uncertainty, there is less transparency around future return expectations, she said.

Given the uncertainty, some of Willis Towers Watson clients are looking to reduce exposure to certain core property types. Industrial is one of the four core property types, but the increased attention to the logistics/industrial space has piqued a lot of investor interest, Ms. Loop said.

While valuations could increase due to a somewhat limited supply of industrial assets, currently the sector has strong tailwinds — including robust rent growth, she said.

Willis Towers Watson executives view light industrial warehouses near urban centers as attractive investments because there is a greater supply/demand imbalance, Ms. Loop said. There is not a lot of spare land to build new warehouses close to urban centers, she explained.

Cold storage is also of interest, given that home delivery of groceries has greatly accelerated during the pandemic, she said. While disruption of supply chains continue to be a concern, companies have responded by stocking excess inventory to accommodate just-in-time delivery, which is making and delivering goods when they are ordered. That adds to warehouse demand, Ms. Loop said.

Many investors access industrial through commingled funds and so can't make tactical shifts to take advantage of pandemic-related trends.

That is the case at the New Mexico State Investment Council, Santa Fe, which oversees $32.2 billion endowments, said Paul Chapman, director of real estate and real return strategies.

"The pandemic created some short-term impacts, which we are not really in a position to exploit since we invest through closed-end funds where our general partner controls the investment decisions," Mr. Chapman said in an email. "Of course, many of those general partners are actively seeking to increase their funds' exposure to industrial."

However, officials at the New Mexico State Investment Council "do have some concern that investors are responding to the strength of the industrial market, in part caused by the pandemic but also part of a long-term secular trend, by overinvesting in the industrial sector."

Once the pandemic ends, consumers may shift some of their shopping back to physical retail and thus dampen demand for industrial, Mr. Chapman said.

"If too much capital is chasing industrial and if consumer demand shifts back towards bricks-and-mortar retail, we could see industrial rent growth moderate substantially," he added.

So far, Willis Towers Watson executives haven't determined if or when the logistics/industrial sector in real estate will reach a point where it will be a less attractive investment.

"Catalysts may include supply outstripping demand, deceleration of rental rates, (and) continued flood of investor capital pushing yields even lower, where significant rental growth would need to be underwritten to generate even slightly attractive returns," Ms. Loop said.

Some managers see opportunity in what they call "urban logistics," which are facilities that sit in close proximity to populous locations.

For Chris Urwin, London-based director of research, real assets at Aviva Investors, his firm views logistics "as the most attractive real estate sector on a risk-adjusted basis over the medium to long term, which is being driven by both cyclical and structural factors."

The COVID-19 pandemic has caused a significant shift toward e-commerce, Mr. Urwin said. "As a result, the level of offshoring and outsourcing that existed before the pandemic has fallen away, met by a simultaneous rise in demand for urban logistics assets," he said.

Chris Berry, El Segundo, Calif.-based managing director in the real estate business of Barings LLC, said that everything in the pandemic put a focus on logistics.

The supply chain was disrupted or cut off entirely in the first couple of months of the pandemic, Mr. Berry said. That's leading some companies, especially pharmaceuticals and aerospace, to onshore some manufacturing.

Other U.S. companies are moving manufacturing and sourcing of raw materials closer to home, so-called "near shoring" to avoid supply chain disruptions in the future, he said. For example, these companies are moving even more manufacturing to Mexico to take advantage of lower labor cost in an adjacent country.

Logistics assets in El Paso, Texas, have benefited from the flow of goods from Mexico to Houston or Los Angeles, Mr. Berry said.

Barings executives are also looking at the "first mile" alternative ports or airports where goods first enter the U.S., and investing in emerging industrial markets. These include distribution warehouses around airports in Cincinnati and ports in Savannah, Ga., and Memphis.

Anton Pil, New York-based global head of alternatives at J.P. Morgan Asset Management, said that while the pandemic most likely accelerated investor interest in logistics, the logistics market is evolving. Logistics is farther along in the U.S. than in Europe and Asia. JPMAM has $8.5 billion assets under management in global industrial real estate.

"We're concerned that the logistics assets in the U.S. are getting quite pricey and we are starting to see increased vacancies," he said. "The U.S. is probably close to saturation."

In the U.S., J.P. Morgan Asset Management executives are focusing recently on truck terminals, which he said are the next evolution of logistics. There is less competition for these properties because it is challenging to find locations for storage yards for trucks, he said.

"To me, the real opportunity is outside the U.S." Mr. Pil said.

Europe is behind the U.S. in the build-out and penetration of e-commerce and investment in the logistics business in general, as is parts of the Asia-Pacific region, he said.

More recently, JPMAM started acquiring assets in Singapore, Australia and New Zealand where there are fewer global real estate and infrastructure managers investing in the sector and where prices are more attractive, Mr. Pil said.

Overseas, JPMAM is investing in the construction of new facilities.

In Europe, there is a lot of demand for modern facilities because older buildings are not as adaptable for modern day logistics requirements, he said.