Covid-19: Logistics: how to keep pace with demand?

What we know

Constraints on distribution are clear.  Grocery stores and 3PLs, along with the NHS and councils have been seeking short term warehouse space to cope with increased infrastructure requirements.  Amazon have reported they are hiring 100,000 additional workers globally, primarily in fulfilment centres and transportation operations, to meet the increase in demand. While the rise in short term requirements and rising demand for online retail are positives for the logistics sector, much of the business underpinning the sector is dependent on retail.  

Manufacturers are seeing demand dry up. Car manufacturers have seen demand slump and Nissan, Ford and Toyota have suspended production. JCB has also halted production as global demand for machinery reduces. Covid-19 is also affecting supply chains.  

Air cargo volumes have dipped.  Heathrow has recorded volumes of 232,000 tonnes in January and February; down 10.5% on last year. A contraction in global manufacturing outputs has resulted in a slow in UK imports and air cargo freight. 

Tenants are requesting assistance.  Many tenants are requesting rent holidays or to pay rent monthly rather than quarterly in order to help with cash flow. 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.

What the numbers say.  In Q1, early figures indicate approximately 5.6m sq ft of take-up in units over 50,00 sq ft, which compares to around 9.5m sq ft in Q1 2019.  Our analysis shows an immediate need of up to 3.2m sq ft nationwide for short-term occupation. This is principally to service online retail, particularly food, and last mile delivery businesses.  

For investment, preliminary volumes are approximately 33% below the 10-year average at £966m. The 10-year quarterly average is £1.45bn. 

What we expect

Negative impacts in the retail sector will be felt. While the rise in short term requirements and increased demand for online retail are positives for the logistics sector, much of the business underpinning demand in the sector, is dependent on retail. Most retailers have a bricks and mortar store network and the negative impacts on this sector will have repercussions in the logistics market. Fashion and other non-essential retailing are also expected to see a dip in online sales; some retailers have taken the choice to suspend online shopping services and will be closing their distribution centres.

Scaling up will be a challenge.  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 growth in online grocery retail will be limited by the supply-side response.  

Expect an increase in demand for flexible space as e-commerce demand rises. However, with some suggestions that social distancing regulations could continue for as much as 18 months, supermarkets are keen to scale up their supply networks to capture this rise in demand, both in store and online. 

Development likely to slow. While some large scale construction projects have been allowed to continue many firms and contractors have already downed tools and more are expected to follow. Developers are also facing a shortage of building materials due to supply chain disruptions and this is also impacting on their ability to continue works. 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. 

Long term, the rationale for investor interest remains intact. Despite the current spike in demand, logistics operators are certainly not immune to tenant risk, or requests for rent payment holidays.  Nevertheless, the underlying structural shifts driving greater demands for logistics space have not abated (indeed, many are arguing they have intensified).  We expect well-positioned logistics assets to remain sought after.    

What we question

How long will the current restrictions last and what will be the lasting effects on demand and supply?  There will undoubtedly be delays to development activity but the length of these delays is very much an unknown at present. We are currently exploring how different scenarios could impact on the level of new development coming online over the next year or so. The chart below explores the possibilities of 3-month and 6-month delays and how they compare with our original estimates.

How will businesses look to mitigate against future supply chain disruptions? There could be a move towards reshoring operations and renationalising supply chains, potentially further driving up demand for space.

How will retailers improve their agility and ability to respond to future demand-side shocks? How much of a lasting impact will Covid-19 have on online retail demand? And what are the implications for industrial and logistics property?