How is Covid-19 impacting on the UK industrial and logistics market?

There has been a significant shift in retail demand. Shop closures and social distancing measures have driven shoppers online. According to a recent survey conducted by RetailX, more than a quarter (27%) of respondents say they have stopped shopping in bricks and mortar stores. Online grocery platforms have been inundated and supermarkets have warned customers they are struggling to cope with demand. Their delivery networks and supply infrastructure do not have the capacity nor flexibility to rapidly scale up their offering and meet demand. 

The need for staying at home has led to increased demand for household essentials and food, and perhaps some electronics or home office supplies. Meanwhile, shopping for clothing and footwear is far from the minds of most consumers, who are currently only allowed out for essential shopping and exercise. Some fashion retailers have taken the choice to suspend online shopping services, and will be closing their distribution centres. 

Short term, the growth in online grocery retail will be very much limited by the supply-side response. Supermarkets will be keen to scale up their supply networks to capture this rise in demand, both in store and online. In January, the online segment accounted for 5.3% of total grocery sales (Source: ONS). The rate of increase over the next few months will depend upon retailers’ ability to scale up their networks to meet demand. Grocery stores and 3PLs along with the NHS and councils have been seeking short term warehouse space to cope with increased online orders and infrastructure requirements.

While the rise in short term requirements and increased demand for online retail are positives for the logistics sector, much of the business underpinning the sector is dependent on retail. Most retailers have a bricks and mortar store network and the negative impacts on this sector will be felt in the logistics market. Food and household goods currently account for just 20% of the online sales market (January 2020), though this figure will certainly rise, much of the gains in this sector will be offset but the falls in department store and fashion online retailing.

Some of the rise in online retailing is likely to become permanent. Many shoppers who previously did not shop online, or did not do their grocery shopping online, are expected to continue using it in the future. Results of the RetailX attitudes survey revealed that 24% of respondents said that after the Covid-19 health issue is over, they will carry on shopping as they are now. Grocery retailers may need to ramp up their online operations faster than previously planned.

Many manufacturing firms have seen demand dry up. Several car manufacturers have suspended production. As well as a slump in demand, manufacturers are also facing supply-side challenges with widespread disruptions to global supply chains. The Covid-19 outbreak may lead businesses to assess ways to mitigate against future supply chain disruptions. Could we see a move towards reshoring operations and more domestically orientated supply chains?

Many tenants are requesting rent holidays or to pay rent monthly rather than quarterly in order to help with cash flow. Landlords are looking at the covenant strength of their tenants as they look to assess the potential impacts on their income. Smaller, multi-let units tend to have shorter lease terms and weaker covenants and tenants and landlords will likely feel the negative impacts of covid-19, more acutely than in the single-let market.

Development activity is likely to slow. The government has so far resisted calls to shut construction sites. Large scale building work has been allowed to continue, though there have been growing concerns regarding worker safety and debate around whether or not the work should be classed as essential. Many firms and contractors have already downed tools and more are expected to follow. 

Building refurbishments are also being delayed and this is having a knock-on effect for buildings committed under pre-let agreements. Landlords may be unable to meet their obligations and complete the works within the specified timeframes.  

Several developments currently under construction will need to push completion dates out into next year and planned speculative developments are likely to be put on hold. This will dampen the level of expected development completions this year. 

Developers and lenders may reassess the risk of planned developments. Lenders are likely to be cautious and the cost of borrowing may increase. Some schemes may no longer prove viable. The vacancy rate is currently around 5.3%. While constraints to future development could restrict supply of new and grade A space, vacancies in the second hand and multi-let markets are likely to increase.