The global Covid-19 pandemic has already had an unprecedented impact on businesses worldwide. In particular it has highlighted the inextricable link between retail and the supply chain.
In the UK we have already seen consumers flock to purchase items from grocery and online retailers, which will impact on the UK logistics property market.
On the demand side, Savills has already recorded over 3 million sq ft of new requirements for warehouse space since 16 March 2020. While precise details remain confidential, they originate from the major supermarkets, online retailers and specialist pharmaceutical 3PLs.
Many of these requirements are short-term in nature and a key question is whether landlords are willing to offer flexible lease terms in the national interest. This would require a step change in thinking given that the average lease length achieved in 2019 was just over 18 years for build to suit properties and 13 years for the whole market.
Consideration too must be given to the building’s use. A typical logistics unit could take between three and six months to fit out. It is therefore much more likely that any new facilities will be used as bulk holding areas where occupiers can store product to drip feed into their existing supply chain.
While for some sectors there is a clear demand for new warehouse space, we have also seen other occupiers delay their acquisitions until greater clarity emerges on the length of the social restrictions in place. With this in mind, will any short-term uptick in demand from certain sectors off set the potential pause in transactions from other more at-risk industries?
On the supply side, our market paints a very different picture to where it was at the time of the last Global Financial Crisis, which will provide some peace of mind. Then, almost 100 million sq ft of warehouse space was available, reflecting a vacancy rate of close to 25 per cent.
Today, supply is just over 35 million sq ft and vacancy is 6.5 per cent or less in many parts of the country. There is also just 4.1 million sq ft of speculative development under construction due for delivery in 2020. Those underway are set to continue, but we are not anticipating any new speculative announcements in the short-term.
While the Chancellor’s announcement that wages will be paid by the state will provide relief to many companies, the risk of tenant default remains. Greater cause for concern, therefore, would be that as the crisis continues we start to see more companies falter, which in turn will mean more second-hand space returning to the market.
In reality, it is too early to judge and could take up to 12 months to materialise. It should, however, be noted that over 40 million sq ft of new supply would be required to see vacancy levels rise to 12 per cent – a tipping point for rental growth to stop.
Overall, today’s prudent levels of speculative development should mean that the market is well prepared to weather the storm on the demand side, assuming we head back towards some level of normality in the second half of the year.
Finally, a longer-term unintended consequence for the market could be the further growth of online grocery shopping, as many consumers, who previously didn’t use such services, become more familiar and continue to use it in the future. Should this happen grocers will have to add capacity at a faster rate than previously anticipated.
Further information
Read more: Big Shed Briefing
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