By CJ Follini | NOYACK Logistics
November 02, 2022
Part 3:Supply and Demand
The third piece in the Let’s Talk Logistics Real Estate series focuses on supply and demand. Within the topic are some nuances that showcase the value of real estate both generally and within our real estate asset classes.
Read on for a refresher on the topic, how supply and demand impact other investments differently than real estate, and why logistics REITs are particularly well-suited to profit from the imbalance. Don’t forget to check out articles one and two if you missed them.
Supply and Demand 101
Supply is how many goods are produced at a certain price point, and demand is the number of goods desired or purchased at a certain price point. As price increases, supply tends to increase as businesses want to sell more goods for a higher profit, and demand tends to decrease as fewer customers can afford the goods. In equilibrium, the amount of goods supplied equals demand at a particular price, so equilibrium establishes an optimal point where price and quantity sold are set.
These ideas are built on assumptions that don’t always hold. For instance, supply or demand can be inelastic, which means they cannot freely shift. If supply is inelastic, the business may be unable to increase production with demand increases. In this scenario, the business can charge a higher price for the same amount of goods to narrow the growing pool of interested customers.
How supply and demand affect investments
Most investments are traded on an exchange where supply and demand have a degree of elasticity. If more consumers demand a stock, they’ll place more orders to purchase it via an exchange. In response, traders can sell more of their available stock to investors. They may also increase their asking price for stocks, but they can also pull the lever of increasing supply.
With investment real estate, it’s much more difficult to increase supply because property can take months or years to develop. As a result, property owners can raise prices in high-demand environments and still sell the real estate, and investors, therefore, earn additional profits.
One real estate subcategory that’s experiencing particular demand increases is logistics commercial real estate. First, the pandemic caused companies to reckon with increased costs and inefficiencies from international supply chains. As a result, both large and small companies are participating in onshoring, or relocating supply chains to exist within their domicile. Second, consumers have new lifestyle preferences and needs. They now prefer delivery within the same day (or a few hours), and they’re more interested in organic and healthy products, which often require storage in cold warehouses before delivery.
Our logistics REIT capitalizes on supply and demand:
Our logistics REIT allows investors to capitalize on the above demand increases as well as supply inelasticities. In fact, we’re using these trends to prioritize some of our five asset classes in 2023:
Future articles in this series will dive into the various ways that our logistics REIT can add value.
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