Lockdown has been like a giant experiment, especially for the logistics sector which has had to deal with unprecedented demand with next to no lead time while adapting to new ways of working, or put another way, social distancing.

By any set of measures, the response has been impressive, providing a glimpse into the potential of a technology-enabled way of life that many had predicted was still some years away. So, what happens next?

Now that the ratchet has been forced up a notch, will life go back to normal or will the forced mass adoption of all things online, whether to order essential items like groceries or to feed people’s growing ‘Amazon habits’, have an enduring impact on the logistics sector?

Logistics underpinned by solid fundamentals

The logistics sector will not be immune to COVID-19, but at the start of 2020 it was underpinned by generally solid fundamentals. Vacancy was low across most of the European market - below 7% in the Netherlands, Poland and the UK - demand was robust and overbuilding wasn’t an issue with opportunities for investors existing across the logistics spectrum, ranging from large distribution centres to urban delivery hubs in inner city areas.

Labour availability was one of the main concerns for logistics operators with the unemployment rate falling to around 6.2% across the EU by the end of 2019. While rates are expected to rise, often from historic lows, governments are implementing a range of fiscal policy measures intended to encourage businesses to retain workers and maintain consumption levels.

The logistics sector is a clear beneficiary of the rise of e-commerce over the last few years. While this is nothing new, the trend is likely to continue unabated with the COVID-19 pandemic and related social distancing measures simply accelerating the rise of online retailing. While some demand may fall away once ‘normal’ life resumes and lockdown measures are lifted, albeit gradually, this is by no means guaranteed.

COVID-19 may generate a spike in online sales for as long as the containment and social distancing measures remain in place as consumers depend more on e-commerce, but the underlying trend is one of continued expansion. The initial impact was on the grocery sector, but this is likely to spread to other consumer sectors. Indeed, we may well see an acceleration in the adoption of online retailing as many businesses turn to deliveries as a way of maintaining business continuity. The current level of online adoption among consumers may become the new ‘normal’. Retail sales are forecast to grow by approximately 2.3% a year between 2019 and 2024, according to Oxford Economics data, while online penetration is predicted to grow at an average of 8.5% a year in the same period according to Savills.

All this extra activity requires more storage space. While some space may be released back to the market as some retailers hit the wall, deliveries are here to stay. Some suppliers have started stockpiling in anticipation of increased online retail spend by consumers, and to mitigate disruption to the upstream supply chain.

In the long term, more warehouses will switch to automation and robots, which creates opportunity for value-add players to take advantage of price dislocation and build costs which have come off their peak, to reinvigorate older stock and upgrade with automation. Short term however, getting materials onsite will be problematic and construction work is being delayed as labour movement is restricted, which means a proportion of the schemes due to complete during the remainder of 2020 and into the first half of 2021 will be delayed. Some schemes may even be withdrawn as developers struggle under tighter financing conditions, all of which adds additional pressure to the tightly supplied warehouse market.

Investment overview

Investment volumes have been rising steadily since the last market trough in 2009, when just €6.9 billion worth of logistics transacted across Europe. In 2017, a peak year that was boosted by some large deals, trading volumes hit €40.4 billion. Interest in the sector has continued at very robust levels over the last couple of years, with €35.8 billion transacting in 2019 with the UK, France, Germany and the Netherlands consistently amongst the most active markets in Europe, also recording some of the highest penetration of online retailing.

Logistics investment volume by source of capital

There is, of course, the much talked about slowdown to the European economy hitting markets hard, although there has been a much swifter reaction by Central Banks than was seen during the GFC which, it is hoped, will go some way to supporting the weakening economic situation. But there are still a lot of unknowns: the main factors being the length of lockdowns, the impact of the gradual lifting of measures being seen across a number of European countries, the possible resurgence of the virus and when and how much consumer demand will be impacted, with the acceptance that a proportion will be permanently lost.

While the market drivers are there, real estate fundamentals underpinning the sector are healthy, capital is waiting on the sidelines to deploy when appropriate opportunities present themselves, the full-year 2020 trading volumes are expected to be subdued. While Q1 numbers are looking relatively healthy with €7.6 billion changing hands and above the long-term quarterly average of €6.2 billion.  Activity levels are largely reflecting the conclusion of deals already in the pipeline pre-COVID-19 and a truer picture is likely to emerge as Q2 progresses. Indications thus far are for a much slower quarter as less product is openly marketed - stymied, for now at least, by the inability to view potential assets, conduct technical due diligence and the gap between buyer and seller expectations on pricing.

Once a new pricing benchmark has been established, capital is likely to react quickly, but during times of uncertainty, investors will favour core assets in strong locations. These will include assets close to infrastructure hubs as carbon emission regulations bear down and are now higher up the agenda and/or gateway cities, which service the growing demand for last-mile logistics. In addition, the wall of global capital headed to Europe is expected to ease, at least temporarily, providing a buying window for domestic institutions and cross-border European capital familiar with their local markets to take a larger share.

What next for occupiers?

COVID-19 has been a shock on both the supply and demand sides. One of the interesting questions this throws up is what occupiers are doing with their supply chains. Historically, companies have minimised supply chain inventories, keeping them flowing at low, but continuous levels, so they can remain competitive.

An additional consideration if there are ongoing shortages to disruptions in global supply chains is a potential shift to re-shoring or near sourcing, as companies bring their supply chains closer to home. This could translate into demand for more warehouse space near ports and airports, and rising demand for distribution hubs along the supply chain.

In summary, COVID-19 is expected to result in higher inventory volumes and a reassessment of business continuity plans, which will create stronger demand for warehouse space. Whatever the outcome of the COVID-19 pandemic, and despite current economic demand side pressures which has suppressed economic activity, when the risk subsides, the expectation is for a rebound in activity.