Logistics in a Post-Covid World: Q&A with Larry Levy and Dominic DeRose

How many items did you buy on Amazon in the last year? How many Zoom meetings did you attend? It’s a big number to be sure. Of course, you are far from alone. As the world begins to emerge from COVID, there is a silver lining for investors who recognize the fundamental ways the pandemic has changed how we all live, work and shop. That sea change has meant an enormous surge in the need for logistical buildings equipped to handle the demand. Think warehouses, fulfillment centers, shipping hubs. And this trend shows no signs of abating.

To further explore this phenomenon, we recently connected with Larry Levy, Co-Founder of Cresset Real Estate Partners; and Dominic DeRose, Director of Investments for Cresset Real Estate Partners. Below, they delve into the opportunity that investing in real estate logistics offers investors going forward.

Larry and Dominic, can you expand on why there is such opportunity in investing in real estate logistics right now?

Dominic: The unprecedented demand for e-commerce caused by the pandemic is of course the big driver. We’ve all become accustomed to buying things differently, and that in many cases we believe will become the norm going forward. As a result, this has shifted the supply chain from the old model to a new model that seeks to minimize the delivery cost to our homes. The net effect is that we need a lot more warehouse space in new and different locations. It is estimated that we need nearly 1 billion square feet of space to meet the demand.

Larry: I would add that the existing inventory of logistics facilities and warehouses is largely obsolete. The ceilings are too low; there are not enough truck docks; there is not enough parking. The demand is for new, adaptive buildings that are built to last for a long time. What we are seeing is a huge flight to quality where developers and landlords are experiencing rent growth and high leasing activity in modern buildings.

E-commerce has grown on average 15 percent per year (even more so during the pandemic). For every $1 billion in e-commerce sales, 1.25 million square feet of warehouse space is needed. Put it all together and there is a need for 250 million square feet of new logistics space per year. It’s a huge opportunity.

What is it specifically about these logistics real estate developments that make them appealing?

Larry: From an investor’s standpoint, there is strong appeal for these types of buildings. They typically only take 8-12 months to build, and leasing up typically takes a similar length of time. In some cases, there is such a demand that they are leasing up during construction. The bottom line is there is not much supply to buy, and the old buildings are often not worth buying. For investors, that is a win-win combination to invest in delivering the logistics infrastructure we need in a post-COVID world.

I’d like to add that one of the things we learned during COVID is that as a nation we are way too dependent on foreign countries. So, now we are “re-shoring,” meaning a lot of manufacturing and warehousing is coming back to the United States. I also believe we are going to need to have deep inventory going forward, because we’ve learned that we can’t afford to run out of what we need, and the “just-in-time” approach to the fulfillment of goods can be very problematic in times of crisis. What we are doing is reinventing the supply chain.

Dominic: I agree. For the last six months there have been dozens of ships sitting off the coast of the Long Beach port just waiting to come in. That is inventory waiting to come in and restock the supply chain and warehouses after a significant gap due to lockdowns. We need to get the inventory infrastructure in this country back to where it needs to be, and that means developing the buildings equipped to store them.

So, what is the outlook for this sector, particularly as we emerge from COVID? How much opportunity lies ahead?

Dominic: We believe consumers are going to continue to buy online. It’s a lot easier to sit on your couch and buy things. Our habits have changed. We’ve also realized we are too dependent on other countries to satisfy our needs. We need to do a better job of taking care of ourselves. All of that requires a fundamentally new approach to logistics real estate. Tenant demand has rapidly moved toward larger, more efficient buildings. For example, the top 100 transactions by square footage in 2020 totaled 103.8 million square feet, which is a 17 percent increase over 2019.

Larry: We believe there is at least 5 to 10 years of opportunity here, maybe considerably more. There is no going back to the way we were. Sure, we’ll eat at restaurants again and go to the theater and sporting events, but we believe how we purchase items and how we work has forever changed. The logistics infrastructure of this country will need to support this new reality. For investors who help to build the infrastructure of the future, there is real opportunity.

To learn more about investing in the logistics space, please email investors@cressetpartners.com or contact us here.