There is already much discussion about how the COVID-19 crisis will impact and inform the retail, office and residential sectors in the future but what about logistics?
Lockdown restrictions have undoubtedly created challenges for distribution – a sharp rise in demand for online deliveries being a nice one – and perhaps accelerated the need for change or different thinking.
But to understand what the future might hold for the logistics property sector we first need to look at what impact the pandemic has had since it began.
The sector headed into the crisis in a pretty robust state, Savills data shows that that Q1 take-up was the third-best ever recorded.
After an initial spike at the start of lockdown, requirements have fallen back but vacancy was already low, something that will be important for the market going forward. Savills expects Q2 take up to be in line with the long-term average.
Our own experience has been encouraging as Tritax Symmetry director Andrew Dickman explains: “We have continued to progress leasing deals during lockdown and rents are robust which is a function of the level of demand and a lack of supply of new buildings.”
There have been few investment deals with which to demonstrate any impact on capital values, but the market fundamentals are strong so no there is no perceptible pressure for landlords and investors to sell.
Nonetheless, the UK is set for a bumpy economic ride as we come out of lockdown but the distribution sector’s low vacancy and the slowdown of development in the past couple of quarters will help if demand does start to fall.
Supply vs Demand
The development pipeline will inevitably be constrained by delays with the planning process due in part to the challenges of remote working and social distancing. The Government has already put in place temporary planning measures to help some sectors and more are likely, which may include extending existing planning permissions by 12 months to allow more time to develop.
Incidentally, if there was a time for the already slow and cumbersome planning system to be overhauled to make it quicker and more efficient for the future then surely it has to be now? Logistics is a key brick in supporting economic recovery, as is construction and development so steps to make planning quicker and more efficient have got to be on the agenda.
While a thinner development pipeline may help keep vacancy rates manageable if demand eases, there is also the potential for a shortage of stock in certain areas. Savills research, based on a three-year rolling average take-up, shows there are 1.15 years of Grade A supply left in the UK market.
Where might demand come from?
The crisis has demonstrated that just in time delivery is sensitive to supply chain disruption.
“We’re expecting, the only logical response to that from anybody who makes or sells anything is to have a bigger buffer which will require more warehouse space,” says Dixon.
There is also likely to be continuing demand for urban logistics to service internet shopping deliveries. Online retail sales growth was up 23.8% (YoY) in April according to IMRG Capgemini Online Retail Index as most high street shops remained closed.
And while some of that trade may fall back to physical retail as shops open and people seek out a familiar, social experience the appetite from consumers to buy online will most likely remain heightened. Lockdown has inevitably introduced new customers to internet shopping accelerating an existing trend.
Automation and Tech
Social distancing is likely to be with us for some time which will speed up innovation around automation and use of robotics within warehouses.
“More high-tech equipment in warehouses is going to be one of the interesting innovations that come from this because robots mean more speed in getting goods on shelves or to customers,” says Dickman. “And as well as being good for safety it helps to create better paid, higher-skilled jobs.”
Speeding up Delivery
Efficiencies may also need to be introduced in the development and construction process so that occupiers can be operational more quickly. Development is still a sequential process with fit-out following practical completion but may need to change.
“We built a 1.5m sq ft unit for Amazon in little over one year from start to finish which was down to the efficient work of our contractors and working in parallel with the occupier so that fit out started before practical completion. Being alert to timescales and streamlining delivery will have to be a focus,” says Dixon.
A Final Thought
The logistics sector entered this challenging period in pretty good shape and while there are challenging times to come, it could result in some interesting and innovative changes that will prove beneficial for the much longer term.
For the full story, look at Logistics Manager.
Stats reference here.