Trends in demand for logistics property have been accelerated by Covid-19 lockdowns as shoppers turn to online. It is a situation that is likely to remain post-crisis, reports Paul Strohm.
It could be claimed that the logistics sector has facilitated some of the few ‘positives’ to come out of the Covid-19 pandemic, an event whose side effects include the acceleration of trends in consumer habits which may permanently alter the nature of demand for property.
Throughout the pandemic, essentials like food and pharmaceuticals have continued to flow with minimal interruption, in large part thanks to logistics operations. And, while consumers have been confined to their homes, prohibited from all but essential shopping, a constant stream of delivery vehicles from the likes of DHL, Hermes, FedEx and the supermarket operators has helped to make life more bearable while helping dispersed office workers to function from home too.
The flipside is that the logistics sector, of which couriers are the consumer-facing component, has also provided a lifeline for retailers. At least for those geared up for online distribution who can benefit from the fact that consumers’ propensity to spend online has been boosted worldwide by governments’ responses to the pandemic – lockdowns generally.
Amazon, the online, all-sectors retail giant, is the prime (no pun intended) example. In the first quarter its net sales increased 26% to $75.5bn (compared with $59.7bn in the corresponding period of 2019) and all by 31 March, at which point the lockdowns
in the US had barely begun. It has forecast net sales of $75bn-$81bn for the second quarter.
But how persistent will spending patterns be when, and if, life returns to ‘normal’? A common view among real estate experts is that while there may be an initial rush to bricks-and-mortar shops when some sort of normality is restored, the ratio of online to over-the-counter sales is unlikely to revert to pre-crisis levels.
As Anita Simaza, head of logistics & industrial, Europe Capital Markets at BNP Paribas Real Estate says: ‘The potential is great and, as we are learning through Covid, [online purchasing] is a habit that can be learned quickly and it is a habit that is hard to unlearn.’
Put another way, the genie is well and truly out of the bottle with continuing scope for further expansion of online shopping. As Simaza reminded participants in the recent online Real Asset Media Logistics Investment Briefing: ‘In the European Union only 63% of the population buys goods and services online so the potential is significant.’ But levels of e-commerce penetration still vary significantly from country to country and the scope is uneven. ‘If we look at Italy, only 38% of the people buy online so 62% of the population does not buy online at all,’ Simaza added.
While, e-commerce has been growing in importance, the Covid-19 pandemic has accelerated the trend by around five years.
Online becomes the norm
Backing Saporito’s assertion is a recent white paper published by P3, Is Covid 19 Ecommerce’s Tipping Point. The publication states that this ‘tipping point’, the moment at which online shopping becomes the ‘default norm’ for the mass market and ‘crosses the chasm’ from being niche to mainstream, occurs when market penetration exceeds 16% of consumers. ‘2020 is predicted to be the year when e-commerce crosses the chasm globally,’ explains the white paper’s author, futurologist Sean Culey.
Certainly the pandemic and subsequent lockdowns across the world appear to have brought forward the day of judgement for a number of prominent retailers, casting a shadow over the mall and high street real estate they occupy.
The distress evident in parts of the retail and retail property segments pre-Covid-19 has been intensified and the pandemic has accentuated the need to re-examine retail real estate in all its guises. Meanwhile, logistics real estate’s already rising status has been further enhanced with investors continuing to allocate funds to the sector.
US-headquartered logistics property giant Prologis concurs that Covid-19 has accelerated changes in retailing with significant implications for logistics.
‘We think 2020 will be the tipping point for e-commerce, it will reach more than 16% of total retail sales, so it will reach about $4.206trn of the $26trn sales worldwide.’
Jean-Luc Saporito, Chief Development Officer at P3 Logistic Parks
The firm has produced a series of research reports during the pandemic. The latest, Accelerated Retail Evolution Could Bolster Demand For Well-located Logistics Space, is focused on the US but Dirk Sosef, Prologis’ European vice president, research and strategy, says the conclusions are not confined to the US. ‘E-fulfillment supply chains need to keep pace with the continued double-digit online sales growth happening across Europe. This was a trend pre-coronavirus and the pandemic has only accelerated the growth across the region, pulling forward several years of adoption.’
Amazon may be the best example of an online retailer taking advantage of the accelerated switch in demand, but others are not far behind even if they are not on the same scale. Nick Preston, director at logistics property specialist Tritax, which owns Mango’s distribution building outside Barcelona, Spain, says the fashion retailer is another good example of a company at the front of this curve. ‘They had plans to extend their building and are bringing that forward. They are adjusting their strategy to be able to pick up this material acceleration in online sales, pick it up really quickly and hang on to it.’
It is widely accepted that a recession will be a further consequence of economies being stifled by the measures intended to thwart Covid-19, but logistics seems likely to be resilient. ‘Although a recession seems inevitable with a dip in GDP which will shape demand in 2020, going forward e-commerce will gain,’ Saporito says.
Prologis’ Sosef identifies a further factor that seems likely to reinforce the growth of demand for logistics property. E-commerce retailers require more than three times the logistics space demanded by their bricks-and-mortar equivalents – because they have a wider range of stock and variants and carry a larger buffer.
Some responses to the acceleration of trends in online retailing and thus the demand for logistics take a little longer to implement. Firms such as Amazon and Mango have highly automated stock picking systems as part of their logistics processes. Sosef says it is too early to predict the extent of increase in the levels of automation, but he assumes there will be increased adoption of these technologies simply because staff shortages are one of the constraints on the sector.
Another constraint on the expansion of e-commerce and other logistics property uses is the availability of real estate. In another recent white paper published by P3 Logistic Parks, Revitalising the 20th Century. Why the Future of Logistics Could be Through Repurposing the Past, futurologist Sean Culey postulates that another by-product of the demise of some retail property is its potential for being repurposed as logistics space – abandoned former malls, large stores and solus retail units are all candidates, in addition to in-town parking garages rendered redundant as urban congestion measures take effect.
And as Tritax’s Preston points out, some of these scenarios are already becoming fact with recent transactions including Amazon’s acquisition of a former Toys R Us store in Croydon, south London for a click-and-collect and final mile distribution point, and online grocery Ocado leasing a former DIY store in Merton, south London, where it is believed to be paying more than the previous retail rent.
Covid-19 is proving to be life changing but not all of it is negative.