NorthBridge Partners is the latest private equity vehicle to bank on the ongoing durability of the surge in e-commerce during the pandemic. The firm closed its $500 million third fund targeting last-mile East Coast logistics real estate earlier this week. To test the thesis, Mergers & Acquisitions interviewed NorthBridge managing partners Dean Atkins and Greg Lauze. And we took a close look at commerce-related capital expenditures made by Amazon Inc. (Nasdaq: AMZN) in Q1 and how they help us read the tea leaves. Here’s what we found.

Cardboard boxes on conveyor roller with racks on background

Private equity continues to make bets on logistics real estate–think warehouses–even as the pandemic winds down. NorthBridge’s recent oversubscribed fundraising follows its recapitalization of a $360 million industrial final-mile portfolio by a subsidiary of Brookfield Asset Management.

It begs the question: will logistics real estate and the surge in e-commerce driving demand for it continue to warrant premium valuations after reopening?

The anticipated return to normal is not expected to upend NorthBridge’s investment thesis about the durability of logistics real estate. “These assets are critical to modern supply chains, as more companies compete for the shortest delivery times to consumers,” Atkins said. “If anything, e-commerce growth during the pandemic has caused more consumers to expect next-day or same-day delivery, and NorthBridge believes that trend will have staying power even after the pandemic subsides.”

Pent-up demand could fill dealmakers’ pipelines as financial sponsors look to deploy capital unspent in the early days of the pandemic, as Mergers & Acquisitions previously reported. Industrial real estate is a largely fragmented market where consolidation can accelerate supply chain management. Did someone say “buy and build?”

Even as the pandemic abates, major logistics operators are still investing large sums in real estate. Strategic interest from the likes of Amazon, whether through outright acquisitions or desire for leasable square footage, could drive M&A demand for well-situated industrial real estate. 

Amazon alone invested about $8.4 billion in commerce-related capital expenditures in Q1, Credit Suisse analysts estimate in a note out today, compared with $4.1 billion in the previous year’s first quarter. One implication? “Amazon is undoubtedly responding to demand signals that is propelling this step-up in investment,” the note reads, “and not only is this going toward fulfillment centers, but it is also going to the middle and last-mile delivery capacity as it looks to return to its progress of driving greater availability of 1-day Prime delivery.”

Good news so far for PE logistics holdings that can provide such capacity. Research firm eMarketer forecast that Amazon would capture 39 percent of the $794.5 billion in U.S. e-commerce sales made last year. 

NorthBridge focuses on investments in the Northeast to capture higher-value assets in the delivery chain. “Traffic congestion and long drive times in this region creates more need for logistics assets that are near population centers and can satisfy demand for next-day and same-day delivery,” Northbridge’s Lauze said. “High land costs and competition from other property types such as residential and office limit the ability to develop new final-mile facilities, which we believe makes existing facilities in these markets more attractive from an investment perspective.”

Amazon’s backwards-looking investment figures don’t quite answer the question of whether Amazon-driven demand will remain strong as pandemic spending tails off. And even a shift in consumer behavior toward immediate delivery satisfaction doesn’t quite sound like an offset for the big ticket consumer items customers won’t order while booking concert and sports tickets instead.

But there are some signs this interest could outlast the pandemic. The behemoth consumer company’s interest appears to be independent of Covid-related ramp-ups, the Credit Suisse analysts say. Amazon is focused instead on raising “consumer expectations around delivery/service beyond the reach of its competitors.” 

For their part, Amazon’s competitors are not standing still, but appear to be pursuing relatively capital-lite investment strategies. Fedex (Nyse:FDX) acquired ShopRunner in December for an undisclosed consideration to deepen its e-commerce capabilities. The shipping company also raised its capex guidance to $5.7 billion from $5.1 billion for fiscal year 2021, last month. Yet that capex will likely be allocated amongst aircraft as well as ground capacity, and represents even at the higher figure, the lowest capex as a percentage of sales in a decade. UPS(Nyse:UPS) strong 1Q result was itself driven by technological efficiencies managing its operations more than by investment in industrial real estate. 

Private equity seeking a slice of the growing logistics real estate market might really be making a bet on Amazon and broader factors to drive shipping growth off a pandemic-inflated base.

For more on Logistics M&A, see our M&A Forecast 2021.