Investing in Supply Chain Logistics: A Conversation with Larry Levy and Dominic DeRose

Think about it. How many items did you buy on Amazon in the last two years? 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 continues to grapple with COVID, and supply chains continue to try and deal with the demands, there is a silver lining for investors who are interested in investing in supply chain logistics and who recognize the fundamental ways in how we all live, work and shop have evolved. 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. This trend shows no signs of abating.

In response, Cresset Partners recently launched its second industrial-focused fund, immediately following the close of its first fund, the Cresset Real Estate Logistics Fund I. In only 12 months, investors committed more than $250 million to fund the development of nine state-of-the-art warehouse facilities. Driven by ongoing supply chain disruption and the significant need for new and modernized industrial facilities in key U.S. markets, tenant demand is strong. To continue to meet that demand, Cresset Real Estate Logistics Fund II is now open to investors.

To further explore why logistics represents such an attractive opportunity for investors, we 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 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 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. The Fed tracks retailers’ inventory-to-sales ratio, and what we’ve seen in this statistic over the last two years is that we’ve been purchasing goods much faster than we can import them. This ratio was hovering around 1.45 in the two years prior to the pandemic lockdowns, and it was last tracked at 1.18 in April 2022, after spending most of 2021 around 1.10.

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. 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 (and 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 many cases, there is such a demand that they are leasing up during construction. The bottom line is that there is not much supply to buy, and the old buildings are often not worth buying. For investors, that is a winning  combination and a strong signal 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 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, and to that point, for our first two projects in the Cresset Real Estate Logistics Fund I, we have seen user demand really materialize during the construction period. In Phoenix, we leased our first building at 303 Crossroads to PUMA only a few months after construction began.

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. That’s exactly what Cresset aims to do with its industrial real estate investment program.

So, what is the outlook for this sector? 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. As an illustration of this, the fastest-growing segment of the market in 2022 has been tenants seeking more than 700,000 square feet. Per CBRE, activity in this size range has increased approximately 20 percent year-over-year.

Larry: We believe there is at least 3 to 5 years of opportunity here, maybe more. There is no going back to the way we were. 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 supply chain logistics, please email invest@cressetpartners.com.

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