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Challenges and Opportunities in Logistics

24/03/2020
Whilst the logistics and industrial sector has inevitably seen some negative effects of the COVID-19 virus including some transactions falling away, a trend which will continue over the next few weeks, we’ve also seen several deals complete and there remains market activity.
 

Long term strategic requirements in the pharmaceutical, nutrition, sports & leisure and the public sector are still progressing regardless of the challenges posed by COVID-19. In addition, the rapid shift to online shopping has created a number of immediate and pressing requirements. Almost all of the supermarkets are searching for short term warehouse space to cope with online demand and we expect short term demand to grow over the coming weeks and months. Several of the REITs are managing their voids and accommodating these requirements. But in other sectors we are seeing growing demand from existing tenants for rent holidays. So far landlords have reacted positively although it’s early days. 

This is a difficult question for landlords seeking to assess the validity of claims and whether government support should provide sufficient aid to tenants, rather than simply placing the onus on landlords who, as yet, are being offered little by the proposed government initiatives.

The development market is unsurprisingly holding its breath. We expect both buyers and sellers to take stock over the next month or two and then to continue with their long term business plans acknowledging that there will be revised aspirations on both sides. Indeed, there are several well capitalised buyers who believe that this is just a blip and have faith in the long term integrity of the sector and are therefore keen to pursue opportunities once the immediate impacts of the virus have subsided.

Investor demand remains positive for strategic holdings and / or assets where the fundamentals are strong. Bidding is competitive in core locations such as Manchester and London / South East. 

A number of purchases have been put on pause however there is emerging evidence that an encouraging proportion of deals agreed pre-outbreak are still proceeding. Imminent sales have generally been put on hold due to the difficulty with access arrangements which may also slow down existing purchases.

Whilst in the short term there will be challenges for occupiers, developers and investors alike, the long term impact is expected to be positive. There are several drivers of note:

  • Retail: The virus has increased the rate of structural change from ‘bricks and mortar’ to ‘online’ particularly in the food sector which to date has struggled to match the transition of non-food retailing. Parents and grandparents are being taught how to order food online and we expect that many of these inadvertent new converts will continue to use this platform long after the virus has declined. Surely investors in the sector will now demand that all retail businesses improve their online offer to weather future disruptive market influences? We have also heard of increased consumption in the homeware and electronics sector which may also lead to short term increased demand for “buffer” storage.

  • Data: Online demand for retail, for services and for media streaming grows relentlessly. The social impact of the virus is likely to accelerate the rate of growth in this sector and demand for data centres will continue to expand, even if we were to ignore the impact of the roll out of 5G. This will create significant demand for logistics and warehouse land, particularly in the South East.

  • Manufacturing: The spike in demand for goods and services created by the virus evidences that many business are not able to cope, and as such we anticipate many will look to increase inventory, shorten supply chains and repatriate part or all of their manufacturing or assembly processes to the UK.

In summary, we expect a challenging few months ahead for the logistics and industrial sector, but overall there is positivity for the short to medium term once the worst of the virus’s impact is over. The importance of manufacturing and the supply chain and the suitability and adaptability of real estate that supports it has rarely been higher profile than now.

 
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