TOO MANY WAREHOUSES? Should Pensions and SWFs Be Aware of the Risks?
Posted on 09/02/2022
Even before the COVID-19 pandemic and government-mandated lockdowns, sovereign wealth funds and public pensions were turning to investing in warehouses to take advantage of the growth in the adoption of e-commerce from various segments of society and product types. The growth of shopping online accelerated during the coronavirus pandemic, as malls and many stores closed across the U.S. Offices and malls suffered and some properties were forced to sell at undesirable prices. Corporate employees working from home could order groceries and goods, while taking online video meetings with customers and peers. In the U.S. suburbs, neighbors could see boxes piling up on doorsteps not just on holidays, but nearly every week or day in some cases. Real estate developers were eager to sink massive amounts of money to build out capacity for warehouse tenants over the past decade.
Asset owners responded by shifting more money away from offices toward logistics assets. Online retailers and behemoths like Amazon.com, Inc. went big and scooped up loads of warehouses in key markets across the globe. Amazon was able to achieve amazing delivery goals (sometimes good being received in less than 1 hour after ordering). Amazon is now looking at reducing the size of its massive delivery operation, a sign that e-commerce may be overbuilt. Amazon has started abandoning dozens of existing and planned facilities around the U.S. In Europe, Amazon has canceled a number of warehouse projects with the majority of cancellations in Spain. Amazon reported US$ 2 billion in incremental costs from having excess fulfillment and transportation capacity in their recent financials. For real estate investment trusts like Prologis Inc., Amazon, GEODIS, and FedEx, remain top lease clients in the United States. Struggling listed companies like Peloton Interactive, the once-popular stationary bike maker, has put its Peloton Output Park in Luckey, Ohio, up for sale. Peloton started building the massive US$ 400 million northwest Ohio industrial park property and abandoned plans in 2022.
Direct Investments by Sovereign Wealth Funds and Public Pensions in Logistics and Warehouses in Billions USD.
Source: Sovereign Wealth Fund Institute (SWFI.com database). Excluding fund commitments.
Sovereign wealth funds and public pensions directly invested a staggering US$ 22.096 billion in logistics and warehouses in 2021 versus US$ 8.545 billion in 2020 and US$ 5.414 billion in 2019. That number year-to-date has shriveled to US$ 3.609 billion. Some sovereign wealth funds that are highly exposed to warehouses in the U.S. relative to its peers is Singapore’s GIC Private Limited. GIC has acquired portfolios of warehouses across the globe, especially in the U.S. and Europe. GIC recently acquired a 58-property industrial portfolio spanning 10 Sun Belt states for US$ 1.26 billion. On the pension side, the Korean Teachers’ Credit Union (KTCU) and California State Teachers’ Retirement System (CalSTRS) on March 31, 2022 signed an agreement to launch a joint venture with 612.2 billion won in capital to invest in U.S.-based logistics centers. CalSTRS and CalPERS are historic institutional investors in U.S. warehouses dating back in the 1990s.
The rising of interest rates is having major pressure on consumers buying goods, as well as the rising cost of energy. This has caused some sovereign investors to rethink their exposure to consumer-linked assets.
If the logistics rush slows down in the Western world, who will be holding the bag? Is the industrial real estate space getting too excited? Real estate fund managers are eager to satisfy the voracious appetite of asset owners clamoring to warehouse investments. The question looms if there could be more distribution centers created than there will be tenants to fill them. Amazon is trying to reign in real estate costs and witnessing the surge of COVID pandemic-era spending shrink, thus there could be more headwinds for Amazon and others to reduce warehouse capacity.
