The pandemic has brought positive change to logistics, but it’s also resulted in increased competition and hardening yields.
In what has been a dramatic year the logistics and industrial property sector has proved to be the one in which to own assets, while bricks-and-mortar retail has become the least attractive.
While physical retail has been the hardest hit by the Covid-19 pandemic and subsequent measures to contain it, Corestate Group’s head of research, Mark Holz, points out that the virus has to some extent affected demand for all segments that ultimately drive the logistics market – manufacturing, light industrial and both online and offline commerce.
“They have all experienced some headwinds, so you might think that logistics should have suffered as a consequence of Covid-19. It clearly has not,” Holz says.
Covid restrictions mean the manufacturing and light industrial sectors have been affected but light industrial activity is diverse and ubiquitous, especially in Germany, so the negative effects have been dissipated. Meanwhile, the swing to e-commerce has created a structural boom that has carried the whole sector forward.
“The reason is simple,” says Holz. “For every additional €1 billion spent online, you need another 75,000 to 115,000 sq m of new logistics space to fulfil those orders.”
‘Logistics has proved to be a very defensive sector, but it is not immune to the economic environment.’
Mark Holz, CORESTATE Group
In Germany alone, online trade increased annually by an average of €8bn between 2015 and 2019. In 2020, that online spending is expected to rise to €16bn. This is fuelling the logistics boom and driving demand for all types of associated facilities on national and regional levels as well as last-mile urban facilities.
Different retail sectors also have various proportions of online trade. FMCG (fast moving consumer goods) and groceries sectors have historically been the least affected by the move online. But during the pandemic they have grown the most and Holz believes this will not slip back post-Covid. “If history is any guidance, money that goes online to e-commerce rarely goes back to bricks-and-mortar retail,” he says.
And while take-up by logistics occupiers has increased by 7% during the pandemic, this is in stark contrast to retail, while the office markets are down by 30-40%, Holz says. “So logistics has proved to be a very defensive sector, in this respect.”
Despite the strength of the sector Holz says it is extremely difficult to predict where it goes from here. “Logistics is not immune to the economic environment. There will be headwinds generally on the consumer side, on the labour market side and on the overall economic side, well into 2021 and this will dampen demand for logistics space.”
The wider industrial buildings sector, of which logistics forms a part, is also being aided in Europe by trends such as ‘reshoring’ and ‘nearshoring’: whereby companies, prompted by supply chain uncertainty, are bringing back processes that had previously been moved to lower-cost economies.
“Companies are now stockpiling in their warehouses so that they are not so dependent on just-in-time production,” Holz says.
Nick Preston, fund manager at investment company Tritax Eurobox, agrees. “Companies have been based for a long time on a just-in-time model and they are moving to just-in-case. What that actually means is companies building up inventory closer to the customer,” he says.
“That is not just retailers, it is manufacturers, automotive producers, a range of different occupiers,” he adds. “They are now looking to hold higher stock levels closer to their customers and their production facilities to weather another storm such as the one we saw in the first half of the year when a lot of companies were, frankly, really squeaking at the edges because their supply chains were a bit fragile.”
“Resilience” is a word used in supply chain management, says business transformation expert Sean Culey. “To protect supply chain you focus on your buffer for uncertainty, you focus on resilience. It does not necessarily lead to the cheapest solution but to one that does not leave you exposed to variations in demand beyond what you can plan at a time when planning is virtually impossible.”
The result is increased occupier demand which is attractive for investors.
“From the investor’s side we are seeing huge demand for logistics space because it offers some of most sustainable rental growth,” says CMS partner Daniel Walsh. “Lease contracts are attractive to investors because of their long terms, fixed rental uplifts and minimal management. They are also attractive propositions to pension funds and other institutions pulling out of the retail and hospitality sectors and buying logistics assets let to supermarkets and 3PLs [third party logistics providers].”
The result, says Walsh, has been more logistics assets coming to the market as developers and logistics companies look to capitalise on demand. But he notes there is fierce competition to secure key locations.
‘We’ve tried to focus on light industrial activity space in France where we see better yield play.’
Edward Bates, STAM Europe
This competition is compressing yields. Edward Bates, president and CEO of France-focused asset manager STAM Europe explains. “The shift from retail and offices to industrial is creating a huge weight of demand for property. [In France] you’re creating a €50 billion demand for something that normally only has a €3-€4 billion investment volume every year, which is why the yields are coming down.”
This means a change of strategy for some, he adds. “Where big box warehouses and the large distribution units have been the focus of most investors over the past couple of years and we’ve seen a drastic drop in prime yields on those types of assets, we’ve tried to focus on light industrial activity space in France where we see better yield play.
“These light industrial activity spaces tend to stay well occupied even through downturns so, even as we go into headwinds over the next 18 to 24 months, where these economies or at least the French economy is going to take a hit from some of the problems linked to covid, we think light industrial activity space will be more resilient.”