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Industrial Property – Too Much Demand Can be a Bad Thing

The coronavirus is becoming a logistical nightmare for landlords. Peter Hemple reports

Shop closures and social distancing measures have driven more shoppers online. According to a recent survey conducted by RetailX, 27% of respondents said that they have completely stopped shopping at bricks and mortar stores and 24% plan to carry on as they are now, even when COVID-19 health concerns are in the past. 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 or flexibility to rapidly scale up their offering to meet the recent surge in demand.

While the current abnormal situation is driving fresh demand for logistics sites from some sectors of online retail, other retailers (clothing and footwear for example) are closing their distribution centres due to the lockdown, according to Knight Frank.

Claire Williams, associate at Knight Frank, says: “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. The rate of increase over the next few months will depend upon retailers’ ability to scale up their networks to meet demand. Grocery stores along with the NHS and local councils have been seeking short term warehouse space to cope with increased online orders and infrastructure requirements.”

However, Williams adds that 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 logistics sector is dependent on retail and because most retailers have bricks and mortar stores, the negative impacts on retail 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.”

Worse than anything seen during the financial crisis
A research report by Lambert Smith Hamptons (LSH) looked at the logistics sector and concluded that the current lockdown will be a catalyst for structural change. The reported stated: “The height of the recession is likely to come in Q2 2020, with the government’s scientific advisers expecting the virus to be at its peak in May to June. With parts of the economy effectively shutting down, the scale of Q2’s GDP contraction may be unprecedented. Many forecasters anticipate that it will be significantly worse than anything seen during the global financial crisis.

“The shape of a subsequent recovery is dependent on the speed and effectiveness with which COVID-19 is contained. Optimists will be hoping for a ‘V-shaped’ recession; essentially a short, sharp shock in H1 followed by a strong recovery in the second half of the year. While (the virus) could have profound impacts that are felt well into H2, an economic recovery of some kind is likely to have begun by 2021.”

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