Continued Resilience in the International Industrial Market

25 Jun 2020

While the new normal will take time to become apparent, the profound long-term impacts COVID-19 will have on the way we live, and the international economy, will be pronounced. We anticipate it will accelerate changes already underway in the industrial market as well as introduce new opportunities for industrial occupiers and investors.

The sector has seen strong rental growth across North America and U.K. markets resulting from buoyant occupier demand and tight supply. While we expect the rental growth to stabilise and some drop in demand near-term, industrial is expected to remain one of the most attractive and least affected areas in international property markets.

The shifting course of data and technology application

Central to this resilience is the growth of e-commerce. Lockdowns around the globe have required consumers to turn to the internet for most, or all, of their shopping needs. This has sharply accelerated an already growing trend, increasing e-commerce demands from retailers in terms of logistics space.

We anticipate this trend will be largely maintained when main streets re-open because customers will have become increasingly accustomed to the convenience of this method of purchasing – particularly for everyday items. A surprising outcome has been the almost overnight adoption of online shopping by older customers – some of whom had limited or no online experience. This is likely to provide new growth areas and demand for retailers.

This e-commerce growth will be a key element of increasing global demand for large distribution centres as well as last mile logistics. In Canada, we are seeing retail units being repurposed by businesses, such as Amazon and Walmart, to support last mile operations. This is a trend we expect to increase in other markets.

Automation of logistics operations is one area we expect to see grow in popularity across the market, particularly in labour-intensive processes which will be impacted by the need for social distancing. However fast-growing unemployment will mean that the labour issues, previously faced by employers, will be reduced and this in turn may result in less overall pressure to automate in the immediate term. It has been notable that in the U.K., fully automated food retail operations have been less able to meet the spike in demand than those relying on manual labour. This is a trend we will be watching around the globe.

Supply chain security

Operations supplying the hospitality and leisure industries, such as food service, have been particularly hard hit. The continuing threat of COVID-19 or other pandemics could lead to long-term damage to this sector and the impact will be particularly felt in urban industrial markets serving major cities. However, the growing demand for last mile logistics can be expected to absorb this stock.

The pandemic is likely to prompt an acceleration in the reshoring of production from the Far East because of the greater security of supply, speed of product availability and narrowing cost advantages.

In the U.S. this has been spurred by the Presidential administration’s agenda to bring back manufacturing to the country. In Europe, Central states are expected to particularly benefit because of their competitive cost base, well educated workforce and good access to markets. We expect this will unlock new investment opportunities.

Greater stock holding to protect against supply chain disruption is yet another anticipated outcome.

Sustainability and decarbonisation

The current pandemic has brought into focus the potential severe impact from unforeseen global events. We believe that parallels will be drawn with the forecast impact of climate change and that this will underline the vulnerability of populations.

Prior to COVID-19, climate change had moved toward the top of many corporate agendas and leading developers and investors have for some time recognised the need to drive down the carbon footprint of their portfolios. Our expectation is that, despite growing pressure on costs resulting from the economic downturn, this will continue to be seen as a priority.

The spread of COVID-19 and the containment policies being introduced are changing rapidly. While information included is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak. We have provided links to some of these sources, which provide regularly updated information on the COVID-19 outbreak. The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such.