PRIME LOGISTICS: Q3 2021

MARKET OVERVIEW

Demand from online retailers, logistics operators and low carbon industries pushed occupier take-up to another record high of 23.7m sq ft in Q3. This is hot on the heels of the previous record 22.9m sq ft agreed in Q2 and already marks out 2021 as the most active year on record. Such heightened activity has suppressed availability to a record low 4.6% and generated significant and widespread rental growth. Developers started 6.4m sq ft of new speculative schemes in Q3 – a record for one quarter- but this space is quickly being absorbed by space-hungry occupiers. Rising input costs and shortages of materials and labour are of increasing concern to both occupiers and developers.

OUTLOOK

Logistics sector M&A and shortened supply chains expected in 2022

Most logistics operators are preparing for what is expected to be one of the busiest fourth quarters for e-commerce on record. However, many are also looking beyond the immediate operational challenges and considering strategic mergers to expand into the ecommerce sector. Several retailers are making plans too, especially those who have had to pay a heavy price to secure goods in time for Christmas. Plans for these companies involve pivoting away from just-in-time management to more regional/domestic supply chains and increasing the use of technology to make operations more agile.

Cost pressures and labour shortages to mount for occupiers, even pure online retailers

Rising property costs, plus increased operational, labour and power costs, have put considerable pressure on already-tight margins for many occupiers. Even pure online retailers who work on thinner margins than multi-channel models are feeling the impact (pre-tax profit margins for European pure online players are c1.5% compared with c5.5% for multichannel, according to Retail Economics). Those retailers for whom low prices are a core selling point are going to be unwilling to pass these price rises on to consumers and will be under pressure to make savings elsewhere.

The economic recovery is likely to face more headwinds

Oxford Economics expects CPI inflation to peak over 4% and remain above 3% until H2 2022 but suggests that structural factors still point against higher inflation becoming embedded given the localised nature of the price rises. However, logistics occupiers and developers have been disproportionately impacted by recent inflation and many are making plans under the assumption that it will become more entrenched. Further energy price hikes, compounded by the phasing out of red diesel in April next year (a key component for developers) and supply problems, especially for those sectors requiring semiconductors, are likely to persist into 2022.

Consumers signalling permanent shift online in many sectors

As the economy continues to open up, the proportion of retail sales online fell back to 25.5% in August 2021. As we enter the busiest time of year for retailers given Black Friday and Christmas peaks, this is likely to rise to 30% by year-end. This is below the covid lockdown-induced peaks of 2020, but still illustrative of the permanent shift online by many consumers. Certain sectors such as homewares and electricals are likely to be key beneficiaries of this permanent shift, which will continue to put pressure on online retailers and 3PLs to reinforce their supply chains to deal with this long term change.