Social distancing measures have accelerated the shift to online spending in recent weeks. But the upside of increased online spending is limited to a few occupiers, most notably supermarkets, and is unlikely to be sustained in the longer-term. Indeed, most occupiers are struggling with a reduction in activity, meaning that overall demand is set to soften and industrial rents will fall slightly this year.
- Social distancing measures have accelerated the shift to online spending in recent weeks. But the upside of increased online spending is limited to a few occupiers, most notably supermarkets, and is unlikely to be sustained in the longer-term. Indeed, most occupiers are struggling with a reduction in activity, meaning that overall demand is set to soften and industrial rents will fall slightly this year.
- If we are right in thinking that the short-term economic costs of the lockdown will be huge and GDP could fall by 15% q/q in Q2, the industrial occupier market is likely to weaken. We have previously noted that the strict containment measures have meant that the retail sector is at the forefront of the disruption. However, in recent years, retailers have accounted for almost 40% of logistics take-up, which means that there will be knock-on effects for that sector too. (See Chart 1.)
- Containment measures have kept consumers out of stores and driven a shift to online sales, but this is most obvious in one of the few sectors whose stores remain open – supermarkets. True, Savills reported that there has been a boost in new industrial demand since mid-March from supermarkets and online retailers. But this may not necessarily translate into higher take-up in Q2. Traditionally, the supermarket sector has accounted for a small share of the industrial market and online sales and most of the current requirements are short term, which may not interest landlords. Unless occupiers expect that the shift to online spending will be permanent, they will be reluctant to take longer-term leases.
- Indeed, data for 2019 show that retailers accounted for a far larger portion of take-up than the food industry. (See Chart 1 again.) Although there could be some increase in industrial demand from supermarkets, the food industry accounted for just 6% of take-up in 2019. And preliminary Q1 take-up data suggest that some tenants have opted to re-occupy space that they were previously marketing as available, notably Tesco’s with almost 1m sq. ft., which could exacerbate demand.
- There are also health risks to workers in warehouses, which could worsen the strains on supply chains and halt activity. In fact, at a time when supermarkets have seen a huge spike in demand, more worker absences and impractical social distancing guidelines in warehouses have resulted in restricted or even suspended delivery services. Already, Amazon workers have gone on strike because of concerns over the spread of the virus in warehouses. While many retailers in the UK have continued to trade online, some occupiers such as Next and Moss Bros have suspended orders to protect warehouse employees.
- Even before the virus, industrial rental growth was slowing. Admittedly, demand has risen for some online goods recently, but even in the build-up to the Brexit deadline, when businesses were stockpiling, it was not enough to prevent rental growth from slowing. (See Chart 2.) Overall, we think that the reduction in activity will mean that industrial rents will decline this year. Our best guess is that industrial rental growth will fall from 2.9% y/y last year to around minus 1% y/y in 2020 before recovering in 2021.
Chart 1: Share of Logistics Take-Up in 2019 (%)
Chart 2: Industrial Rental Values
Sources: MSCI, Capital Economics
Prohad Khan, Property Economist, email@example.com