Real estate is benefitting from the growth of e-commerce, where the supply chain is evolving from a cost center to a revenue generator, according to the head of Prologis Inc.'s venture capital arm.
"We view Ventures as a way that we can understand where change is occurring, where disruption is occurring," William O'Donnell, managing partner of Prologis Ventures, told FreightWaves CEO Craig Fuller during a discussion on "Fuller Speed Ahead" livestreamed Nov. 13 from FreightWaves LIVE Chicago.
Prologis, which holds $111 billion in logistics-focused real estate assets, formed its venture capital arm in March 2016. It has made 20 investments to date, including in FreightWaves. The company does not discuss the size of its investments, only its goal to find the best opportunities.
Investing For Solutions
Prologis aims to create value for customers rather than the traditional approach to real estate in which a lessor could spend three months negotiating a lease and have little to no contact with the leasee thereafter.
By understanding customer pain points such as labor and transportation, Prologis is investing to help create solutions, O'Donnell said.
For every dollar of rent, customers spend $6 on labor and $10 on transportation. By studying the impact of technologies such as automation, predictive analytics and inventory management on warehousing, Prologis is able to provide more than four walls to customers.
"Part of what you're seeing across the logistics industry is everyone trying to figure out how to approach this evolving world," O'Donnell said. "It's in its infancy. We're a partner that is helping them solve their tough problems, and rather than making it a transactional relationship, we make it a value-added partnership."
Customers are examining supply chain networks to figure out how they can place inventory to meet consumer expectations for same-day or next-day delivery.
O'Donnell said emerging companies like Flexe Inc. that are building out flexible warehouse networks that leverage underutilized space to provide fulfillment and short-term space demands. Prologis is an investor in Flexe.
Prologis' real estate portfolio is focused on markets where annual consumption exceeds $100 billion. Meeting short delivery time frames requires real estate closer to where the goods are consumed.
Making the most of warehouses whose utilization ebbs and flows is a big opportunity, O'Donnell said. Weather disruptions require redirecting freight to other locations. Companies test-marketing a new product in certain markets may need space for only weeks or months.
"What may be consumed can evolve over time," O'Donnell said. "Because the space is so flexible, you can continually move people in and out."
Consumer demand for choice in what they want and when they want it drives stock keeping numbers (SKUs) ever upward. Online retailers require about 1.2 million square feet to generate $1 billion in sales, which is three times the space requirements for traditional retail networks.
"It's a fascinating puzzle to solve," O'Donnell said. "It's ‘how do I place my inventory as close to consumption as possible but also be predictive.'"