We are experiencing an e-commerce revolution with more consumers discovering the benefits of shopping online. Following on from the record 32.8% share of UK e-commerce sales in May 2020, this figure decreased to 28.1% in July as lockdown measures eased. The online share of total retail for the months of August and September* is expected to see further contraction before we approach seasonal peaks towards the end of the year. However one thing is certain - retailers, parcel couriers and third party logistics providers have demonstrated that they are up for the challenge to service this extra demand.
Despite an ominous economic backdrop, industrial take-up activity in H1 2020 topped 18m sq ft**, 20% ahead y/y. This strong demand has continued unabated into Q3 as demonstrated by Pets at Home’s pre-let of a 670,000 sq ft warehouse in Stafford; Amazon’s letting of Hinckley 532 (532,000 sq ft) from IM Properties at Hinckley Park, and Great Bear Logistics signing for 335,000 sq ft at Central M40 in Banbury to name a few. While this year’s take-up could potentially come in close to the 2018 record level of 36m sq ft, demand has been driven principally by the growth of e-commerce. GDP and total domestic consumption are not expected to reach their pre-pandemic peaks any earlier than the end of 2021.
Rental growth post global financial crisis
Given the UK’s economic contraction, it would be reasonable to expect falling industrial rents over the next few quarters. If we look at what happened in 2008, when the economy shrunk for five consecutive quarters from Q2 2008, data from MSCI demonstrates that industrial rents started their descent in July 2008 and it took around eight years for rents to fully recover (see chart). The industrial sector is not immune to deteriorating consumer confidence. Yet so far, rents have held firm and in some instances have shown growth. So, why has this been the case?
- The current vacancy rate for distribution warehouses is at 6.2% (17.9% in 2009)
- Developers have been more forensic than in the last property cycle when creating new supply
- Amazon’s acquisition spree is contributing to keeping the supply/demand balance in check
- Advances in omni-channel retailing technology are creating new opportunities
- Economies were put into an induced coma, rather than weakening due to cyclical drivers (e.g. debt cycles, asset bubbles, etc)
Current headwinds and future trends
The sector remains in a healthy state but activity will not continue to flourish in a deteriorating economic environment. Investors and developers should be mindful of and ready to adapt to economic headwinds.
Over the medium and long-term, the uptick in digitisation, both from a consumer and business perspective, will only accelerate demand for warehousing space. Moreover, the implementation of the 5G network will host new customer-centred technologies, resulting in even more requirements for e-commerce services, shortening the gap between the end consumer and fulfilment operations.
Source: MSCI Monthly Digest/Colliers International
*Latest ONS data currently available up to July 2020; next data release 18 September
**Occupier deals for warehouses 100,000+ sq ft