Supply chains have been disrupted and evolved at a rapid pace.
From strength to strength
The same drivers that are negatively affecting the retail sector continue to drive demand for the logistics market which continues to go from strength to strength. Many of the sector’s fundamentals have strengthened during the year as a result of Covid-19. We have seen an acceleration of drivers that continue to power the sector as the proportion of online retailing has jumped significantly and supply chains have been disrupted and evolved at a rapid pace.
This has driven occupational demand for distribution warehousing, with 2020 likely to be a record year for Big Box take-up across the UK, exceeding the record in 2018. We have seen an explosion in demand for space from e-commerce companies as the sector has increased its share of retail sales, with the knock-on effect of this driving demand for local logistics and last mile delivery as the likes of Hermes and DPD continue to expand.
Amazon has been the most notable active acquirer of space, but a number of supermarkets have doubled their online platforms and high street retailers have been increasing their online presence. We are continuing to see an increase in demand from data centre providers. Furthermore, we have also seen the logistics sector benefit as a direct consequence of the outbreak, as storage space has been acquired for pharmaceuticals and PPE supplies. The shift in the UK’s eating habits, with pubs and restaurants closed for much of the year, continues to drive an expansion of Dark Kitchens and we are now seeing more demand coming from the Vertical Farming sector. We are also continuing to see an evolution of the type of building that occupiers want, with increased appetite for larger buildings with greater eaves heights to accommodate economies of scale and automation.
Whilst some of this activity may fade away as the impact of the pandemic recedes, many of the changes we have seen in consumer behaviour are likely to endure. What seems certain is that the explosion of experimentation with hyper-local delivery methods will impact future thinking on local supply chains. Retailers looking to compete with major online players such as Amazon will need to remain focussed on constantly driving down costs and reducing fulfilment times. This will become a process of continual trial and error, with frequent testing of new concepts and partnerships to quickly gain scale or pivot to a new strategy. Last-mile and urban logistics will be a key battleground.
Last-mile and urban logistics will be a key battleground.
Shed immunity
Despite the positivity in the market, the sector is not immune to the challenges that the economy will face in 2021. Whilst consumer spending has continued to be strong this year, we believe that September saw a high point, and that tapering of fiscal support, rising unemployment and continued containment measures will weigh on consumers’ ability and willingness to spend in 2021. This will have an impact on the sector.
The disruption seen in the last year, and a looming Brexit trade deal deadline has led to a number of businesses looking to reshore and de-risk their operations by setting up manufacturing facilities in the UK. While this is positive for the sector, this brings additional cost pressures in the medium term.
The proportion of online retailing has jumped significantly and supply chains have been disrupted and evolved at a rapid pace.
The hospitality sector has been dealt a significant blow by the events of the year, and this has brought a fall in industrial demand for those units serving business space, notably ‘London’s kitchen’, Park Royal. Similarly, with Heathrow and Gatwick currently operating at approximately 15% of usual capacity, demand has curtailed significantly although continued appetite for last-mile logistics units, as well as a tight supply pipeline, continues to support rental growth in these markets.
So far, we have seen a limited amount of space come back to the market, but the sector will not be immune to the downturn and there may be markets which are disproportionately hit. Multi-let industrial and Mid-box are more likely to cater to a wide range of tenants across a diverse range of sectors and covenants.
Land grab
Land values continue to remain strong, with continued demand underpinning values and putting further constraints on land supply, particularly in London and the South East, with South London seeing £4 million an acre.
Industrial land values are beginning to compete with residential land values in the South East and often obtaining an industrial consent is a quicker process. Indeed, there is currently much activity finding and acquiring land for developers, as they form alliances with cash-rich funds. The market is changing constantly but we do not see the fundamental under supply of product and increasing demand changing.
Land grab
Land values continue to remain strong, with continued demand underpinning values and putting further constraints on land supply, particularly in London and the South East, with South London seeing £4 million an acre.
Industrial land values are beginning to compete with residential land values in the South East and often obtaining an industrial consent is a quicker process. Indeed, there is currently much activity finding and acquiring land for developers, as they form alliances with cash-rich funds. The market is changing constantly but we do not see the fundamental under supply of product and increasing demand changing.
