With e-commerce booming globally due to the pandemic, the logistics sector is under tremendous pressure to match demand. In Asia-Pacific, in terms of corporate real estate, only one-fifth of the required capacity is available. We speak with Tim Armstrong, Global Head of Occupier Strategy and Solutions at Knight Frank, about this undersupply situation and how the logistics sector in Asia is coping with this reality.
Unravel: Your report says Asia needs five times the space for logistics that is currently available. Is this a recent phenomenon? What is this a result of?
Tim Armstrong: During the global health crisis in 2020, the logistics sector in Asia faced an evident supply-demand imbalance. The surge in e-commerce demand overwhelmed asset owners, particularly those lacking sufficient space, such as institutional-grade properties. This was aggravated by delays in completing institutional-grade assets in the Asia-Pacific region.
We expect the current structural undersupply situation to persist over the next three to five years, which will contribute to rental and pricing growth in the medium term. Prologis, the largest industrial real estate company in the world, has estimated that online retailers require an average of 1.2 million sqft of distribution space per billion dollars of online sales. Considering a profit margin of 10% for the entire e-commerce industry and referring to the study conducted by the Boston Consulting Group, which states that Asia-Pacific is expected to generate approximately $350 million in e-commerce revenue by 2025, it appears only 20% of the necessary capacity is currently available. This is driven by the share of the total e-commerce penetration rising from less than 10% (9.6%) in 2019 to 21% by 2025 on average (see figure below).
Unravel: What’s your assessment of how the region’s logistics sector performed through the pandemic?
Mr Armstrong: Throughout the pandemic, the region’s logistics sector faced challenges and opportunities. Exponential growth occurred, driven by high demand from third-party logistics (3PL) players, e-commerce companies, and pharmaceutical firms.
Disruptions in the global supply chain and restrictions created logistical hurdles, prompting a shift from just-in-time to just-in-case inventory management. Despite impacting cross-border trade, the sector showcased resilience and innovation. Safety measures were prioritised, technology adoption accelerated, and facilities were expanded to meet evolving demands.
The sector demonstrated adaptability, resilience, and a commitment to meeting changing consumer needs. As we move into 2023, market fundamentals suggest a generally balanced logistics market in Asia-Pacific, with rental growth moderating compared to previous years. Build-to-suit solutions and institutional-grade assets remain attractive to logistics occupiers. Structural factors continue to support the sector’s long-term prospects.
Unravel: If you had to highlight one big change in the logistics sector pre-COVID compared to now, what would that be?
Mr Armstrong: The growth of the e-commerce sector as a whole. For many, the pandemic was the first time they used an e-commerce platform and it drove penetration rates. Consumers had also built up larger household savings and had more discretionary income.
Unravel: How is the shift from just-in-time to just-in-case supply chains impacting the logistics sector in Asia-Pacific?
Mr Armstrong: Companies are now maintaining higher inventory levels to mitigate disruptions, driving increased demand for warehousing and storage facilities. The emphasis on risk management and contingency planning has led to supply chain redesign and a greater focus on supply chain visibility and collaboration. Logistics providers are investing in efficient warehousing technologies and adapting transportation patterns to meet the new demands.
Unravel: How is the ESG imperative impacting logistics in developed Asian markets like Hong Kong and Singapore?
Mr Armstrong: Ignoring these practices risks losing out to competitors. Our Knight Frank (Y)OUR SPACE 2021 survey revealed that 39% of Asia-Pacific respondents recognise that ESG implementation enhances corporate reputations, a key expectation from investors and tenants. Accessing sustainability financing becomes possible for developers and owners investing in sustainable projects.
ESG standards are expected to tighten as occupier requirements drive a flight-to-quality trend. Outdated facilities must retrofit and upgrade to meet expectations or risk losing market share. Failing to adopt sustainable practices can result in lost rental value, returns, and exit yields, along with higher operating costs due to inefficiency.
Embracing ESG practices offers numerous benefits, including enhanced reputation, competitive advantage, and access to financing. As industry standards evolve, proactive adaptation becomes imperative for sustained success in the logistics sector.
Unravel: What are some of the challenges the sector is faced with in the developed markets of the region?
Mr Armstrong: The consistent challenge across all markets is the lack of quality product. Demand has outstripped supply and the availability of quality land has constrained development. As the economy tightens and inflationary pressures hit the consumer, we are seeing demand moderate which should ease some pressures.
Unravel: What are some of the challenges in emerging Asian economies?
Mr Armstrong: While emerging markets have a large population base, they often do not have the advanced infrastructure of developed countries which can make them less appealing to institutional grade developers. As a result, development can be constrained.
Unravel: How can these be overcome?
Mr Armstrong: Some of this is a factor of time and government investment. In the current environment, emerging markets will appeal due to the cheaper cost base.
Unravel: What are some of the ways in which policymakers and industry leaders can collaborate to develop a robust and sustainable logistics framework in Asia-Pacific?
Mr Armstrong: To alleviate demand and rental pressures, several authorities are establishing logistics hubs in neighbouring cities and provinces. However, these precincts are still in their infancy, and it will take a few more years for their scale and quality to match those in prime areas.
Tim Armstrong
Tim brings over 20 years of experience in transaction management and advisory, advising both occupier and landlord clients across both the office and industrial sectors. As the Global Head of Occupier Strategy and Solutions, he is responsible for growing Knight Frank's occupier and global portfolio solutions business. Based in Singapore, Tim also heads the Asia-Pacific Occupier Strategy and Solutions team, which deals with some of the world's fastest growing and most dynamic markets and companies.
