THREE SOLID SOURCES OF DEMAND
While there are short-term headwinds from the global recession, the long-term outlook for industrial & logistics (I&L) remains positive for three key reasons:
- E-commerce will increase its share of total retail sales. As it has been for more than a decade, online sales will be the biggest catalyst for both activity and change in industrial real estate over the next cycle. Increasing demand for goods bought online, especially food, will fuel the need for distribution facilities at a pace much higher than in the current cycle.4 Euromonitor forecasts that online sales as a percent of total retail sales in the top 10 countries for e-commerce penetration will rise to 21% by 2021 from 17% in 2019.
- Retailers and manufacturers will increase their “safety inventory.” To ensure inventory levels are adequate to quickly meet demand, retailers will insist that vendors keep higher amounts in stock, thus increasing the demand for warehouse space. The Institute for Supply Management (ISM) Manufacturing Inventories Index rose for a second consecutive month to a level of 50.5 in June.
- Diversification of supply chains will occur either throughout Asia or through reshoring to North America and Europe. Supply chains that rely on Mainland China have been disrupted by U.S.-imposed trade tariffs and the COVID-19 pandemic. Other factors like rising labor costs and intellectual capital concerns also may drive companies away from Mainland China and into other parts of Asia, Europe, Mexico and even the U.S., especially as automation improves.
FIGURE 13: E-COMMERCE SALES BY COUNTRY, % OF TOTAL RETAIL SALES
Source: Euromonitor, Q2 2020.
Note: Does not reflect the COVID-19 impact.
CORE, URBAN LOGISTICS HUBS WELL SUPPORTED IN RECESSION
Established markets near large population centers will face low risk for negative fundamentals during the recession. Emerging logistics hubs near seaports or inland ports will have moderate risk in the short term from generally high levels of speculative development (particularly in the U.S.) potentially creating a supply/demand imbalance. Secondary and tertiary suburban markets that rely on local economics likely will see the most softening during the downturn but could provide institutional owners and investors long-term yield opportunities.
E-COMMERCE, FOOD & BEVERAGE, MEDICAL AND 3PL USERS DRIVE DEMAND
Occupiers that pose a low risk to industrial real estate portfolios include e-commerce, food & beverage (grocery), medical, data providers and national third-party logistics providers (3PLs). These have been the most active industries during the pandemic and will continue to expand in the long run. In the U.S., larger-size space blocks are preferred. An increase in sublease space availability is expected in the coming months as occupiers temporarily decrease their existing footprints, especially near ports of entry with less imports.
Overall warehouse demand in Asia Pacific was stable in Q1, supported by resilient e-commerce demand and surging last-mile delivery requirements from companies selling fresh food. Australia and Greater Tokyo registered spikes in demand from grocery stores for short-term leases to house more inventory for online deliveries—a trend that likely will continue.
NEW SUPPLY COMING ONLINE DESPITE BRIEF SLOWDOWN IN NEW CONSTRUCTION
Despite a relatively brief suspension of new construction in some markets, most of Asia Pacific’s 74 million sq. ft. of new supply in 2020 will be delivered as scheduled—a 12% increase from last year.
In the U.S., after a temporary halt, construction ticked up in May with 35% preleased. This likely will have a marginal impact on vacancy rates.
The average vacancy rate in the U.S. and Europe remained relatively low with completions on a rolling 12-month basis as a percentage of total inventory relatively tempered for most markets.
In EMEA, logistics occupiers have shifted their requirements to build-to-suit (BTS) development, lowering the number of speculative projects under construction. The increasing demand for BTS has tightened vacancy rates across most European markets. Supply for new facilities is even tighter and has pushed up rental rates over the past few years, especially in urban locations—a trend that should continue next year.
FIGURE 14: COMPLETIONS AS % OF TOTAL INVENTORY VS. VACANCY RATE BY COUNTRY
Source: CBRE Research, Q1 2020.
*Includes Beijing, Shanghai, Guangzhou and Shenzhen.
SUPPLY CHAIN RESILIENCE AN EMERGING THEME
The COVID-19 pandemic has increased companies’ adoption of “China Plus One” strategies to add manufacturing facilities outside of China, which were already underway due to the U.S.-China trade conflict and rising labor costs. Strengthening supply chain resiliency and continuity is now a major concern and will lead to less centralized supply sourcing as companies diversify.5
Even before the pandemic, e-commerce as a percentage of total retail sales was expected to rise steadily over the next decade, with CBRE Research projecting it to reach 39% by 2030. In APAC, the trend has accelerated significantly over the past 12 months, with China and Korea registering e-commerce penetration of 24.1% and 41.4%, respectively—up by 5.5% and 6.4% year-over-year as of April. The pandemic likely will push online sales even higher and increase the demand for industrial real estate, especially modern Class A space, particularly in the U.S.
E-commerce and grocery retailers will further shore up their last-mile locations and outsource their costly operations to 3PLs. As e-commerce accounts for a greater share of total retail sales in coming years, occupiers may be willing to pay more for modern urban distribution centers, leading to an increase in redevelopment projects.
OMNICHANNEL WILL BE FOCAL POINT
Retailers will continue taking an omnichannel approach to distribution, combining their brick-and-mortar store portfolios with their expanding e-commerce distribution center network. This has implications for building owners and investors, who will need to reposition their assets for the new reality of combining retail and distribution centers.
Many demand drivers that correlate with increases in e-commerce sales and the subsequent need for more inventory bode well for older industrial real estate inventory. The need for reverse logistics operations also will grow, with more retailers and 3PLs utilizing space specifically designed to warehouse and sort returns. And storage of additional “safety inventory” will be required for quick replenishment of fulfillment centers.
4 See recent U.S. MarketFlash.
5 For more information on the Asian supply chain, see CBRE’s “ViewPoint: Refocusing Supply Chains in the COVID-19 Era.”