Natural Disasters Fuel Resilient Warehouse Premium

Sheets of rain and violent winds swiped western Japan during Typhoon Jebi last year, submerging Kansai international airport, blowing a tanker into Osaka bridge and disrupting power, travel and commerce in one of Japan’s most densely populated regions.

During the havoc wrought by Japan’s strongest storm  in 25 years, select industrial warehouses—ones equipped with early seismic warning systems—fulfilled overnight e-commerce delivery promises.

Natural disasters like Jebi highlight the value of resilience – particularly in industrial real estate and infrastructure investments.  Resilience benefits investors, warehouse owners, operators, manufacturers, suppliers, consumers, employees, communities and everyone—and everything—touched by the global supply chain.

“Resilient buildings provide value for our stakeholders because they withstand extreme weather and natural disasters more effectively, and they reduce the cost and waste associated with damage and reconstruction” according to “A Culture of Resilience”, the recent sustainability report from the San Francisco-based industrial warehousing behemoth, Prologis.

And resilient Prologis’ buildings are. The firm’s Japanese warehouses are outfitted with seismic isolation systems that absorb earthquake shocks, early warning alarms and back-up energy and water supplies, all of which helped safeguard operations during Typhoon Jebi.

As Prologis’ CEO Hamid Moghadam explains, “When hurricanes and earthquakes hit North America and typhoons struck Japan last year, our buildings stood strong while our teams mobilized immediately – keeping our customers in business or putting them back in business quickly.”

Prologis, in particular, has a lot at stake during these natural disasters, currently claiming more than 3,200 facilities and 768 million square feet of space across 19 countries. The firm employs 800,000-plus workers and counts more than 5,000 worldwide brands as customers.

Already an industrial real estate powerhouse, Prologis’s $85 billion acquisition of competitor DCT Industrial Trust last August augmented the warehousing behemoth’s existing U.S. foothold through absorption of DCT’s 73.7 million square feet and DCT’s 840 customer brands.

But Prologis isn’t even the largest warehouse operator in Asia.  That title goes to a GLP Logistics, recently acquired for $12 billion and privatized by a private equity consortium led by China Vanke Co., Goldman Sachs’ former China chairman and Chinese fund Hillhouse Capital. 

GLP currently boasts a 98% leased portfolio of assets in the United Kingdom (57%) Germany (25%) and France (14%). GLP itself acquired a few other firms in recent years, including Gazeley for $2.8 billion in 2017, Hillwood Development for $1.1 billion in 2016 and Industrial Income Trust for $4.5 billion in 2015.

With a share price hitting an all-time high of $72.37 on March 13, 2019, the market has rewarded Prologis’ investment decisions. The resiliency emphasis, in particular, pays incalculable dividends – publicly and privately, short and long term – and competitors like GLP should take notice.

According to the National Institute of Building Sciences, the U.S. saves $4 for every $1 invested upfront in resilient infrastructure. Considering the increasing number of disastrous weather events seen in recent years, these investments could mean even more savings as natural disasters proliferate.

Of the five most disruptive natural disasters to the global supply chain in 2018, three took place in North America and two in Asia-Pacific: The North American Blizzard/”Bomb Cyclone” (January); Taiwan’s 6.4-magnitude earthquake (February); U.S. Hurricanes Florence (September) and Michael (October); and Typhoon Mangkut in Philippines, Taiwan, China (September).

In terms of costs, 14 separate billion-dollar disasters hit the U.S. in 2018: two tropical cyclones, eight severe storms and two winter storms, as well as bouts of drought and wildfires. Previous years averaged more billion-dollar disasters — 16 events in 2017 and 15 events in 2016.

The 2018 U.S. National Climate Assessment issued by the U.S. Global Change Research Program, mandated by the Global Change Research Act of 1990 and targeted real estate and infrastructure resilience.

“Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century” reported this latest edition of the National Climate Assessment.

Consider the historic surge in industrial real estates rents.  According to Cushman & Wakefield, 2019 industrial rents should rise 7.1%, hitting a new high of $6.68 per square foot by year-end 2020. That’s up from $6.24 per square foot in 2018 and follows a 4.2.% uptick from 2017 to 2018.

The growing appetite for immediate online order fulfillment fuels this incline.  Today’s retail brands don’t just prefer reliable and disaster-resistant warehousing; increasingly, e-customer’s demand it.

“Almost 25% of consumers are willing to pay significant premiums for the privilege of same-day or instant delivery,” a recent Travel, Transport and Logistics report from McKinsey & Company finds. “This share is likely to increase, given that younger consumers are more inclined (just over 30%) to choose same-day and instant delivery over regular delivery.”

McKinsey predicts that demand supporting premium rents in last-touch facilities will remain at least until the next decade when drones, autonomous ground vehicles and other technologies invariably enter the delivery arena.

Among the growing number of big boxes dotting the globe, resilience brings differentiation for warehouse customers that want 100% uptime – and can pay for the privilege.

This post first appeared on Forbes.com. To see the original, click here.