2020 has been a historic year for industrial & logistics, with the sector outperforming retail and offices in terms of total returns and reaching record highs for take-up and occupational demand.
Experts at Colliers International predict investment volumes for industrial assets are expected to reach in excess of £7.0 billion before the year-end, leaving industry experts pondering ‘how long the party will go on’ for real estate’s darling asset class of 2020?
“With the national lockdown earlier this year bringing both occupier and investment activity to a halt, the sector has rebounded very quickly and now is stronger than before the pandemic struck back in March,” said Andrea Ferranti, Head of Industrial & Logistics Research at Colliers International. “The industrial sector has witnessed strong demand from overseas and national investors. As a result, there has been more yield compression in 2020 for well-let, prime distribution warehouses, as well as multi-let opportunities in close proximity to urban centres. Given, we do not expect the Bank of England to raise its base rate (0.1%) in 2021, it would not be unexpected to see further mild yield compression in 2021.”
Colliers’ latest market report states that greater adoption of online commerce is expected to continue as the UK population grows and ages and advances in technology make it easier for both manufacturers and retailers to reach the end consumer. Furthermore, supply chains continue to move away from the linear model to primarily serve the store networks and more towards a centric model, where the consumer dictates timings and frequency of stock replenishment.
Len Rosso, Head of Industrial & Logistics at Colliers International said: “The provision of logistics stock has never been more critical. Supply chains are being tested amidst a challenging economic backdrop and rising consumer expectation towards more timely deliveries, while occupiers are faced with a conundrum: where an unfavourable macroeconomic environment is accompanied by a strong upsurge in consumer appetite for fast, online deliveries. Add to this the Christmas trading period and you can see how inventory planning becomes more and more difficult and unpredictable. There is also evidence of a return to stockpiling from occupiers who are feeling nervous about short-term supply chain disruptions due to the fast-approaching Brexit deadline.”
The latest figures from the Office for National Statistics (ONS) point to a further uptick in online sales due to lockdown 2.0 and the implementation of the new tier level restrictions. October data shows a 28.1% online share of total sales and although it took more than ten years for the annual share to increase from 7.3% to 19.2% in 2019, Colliers expects annual online sales to reach 30% of total retail sales for 2020.
Supply/Demand dynamics
Colliers’ report goes on to state that take-up for distribution warehouses (that is units sized 100,000 sq ft +) topped 34 million sq ft in Q1-Q3 2020, 10.7% ahead of the figures for the whole of 2019. Demand has remained strong throughout the year and Colliers is predicting that annual occupational demand will reach a new record close to or over 45 million sq ft. Meanwhile, the average deal size reached a new record this year at 310,000 sq ft for the period Q1-Q3 2020, compared to 213,000 sq ft recorded back in 2013.
Len Rosso explains: “Occupiers continue to opt for larger and better quality space in order to benefit from economies of scale which will help to protect profit margins while future-proofing their supply chains. At the smaller end of the market, activity has been impacted by the lockdown measures, but we expect demand to pick-up as the economy recovers.
“Sustaining the current level of extraordinary activity into next year is unlikely, but we believe take-up will remain above average. We expect occupiers to remain acquisitive, although Amazon will most likely reduce its leasing activity in 2021. The warehouse acquisition program of the American online giant seems to follow a bi-annual cycle which mainly evolves around planning for the execution of larger transactions.”
Rental Market
Colliers is forecasting an annual ‘all industrial’ rental growth of 1.4% this year, with London and the Rest of South East’s rental growth expected to outperform at 1.7% and 1.8%, respectively. Stronger growth of circa. 2.0% is expected in 2021 for distribution warehouses.
Andrea concludes: “This year has been extremely challenging for business planning and while we expect the fog to partially clear in 2021, countries around the globe are still fighting against the economic fallout and the health crisis brought about by COVID-19.
“Looking ahead, supply chains will continue to be tested in a low margin environment, therefore investment will be needed to protect profit and market share whilst ensuring the consumer remains at the centre of the wider distribution network. Occupiers who fail to adapt to a fast-changing environment will be left behind as consumers are increasingly gravitating towards those businesses who leverage technology to provide the best customer experience.”
