The online surge resulting from Covid-19 lockdowns caused a rush in demand for warehousing and last mile logistics in supply chain. Consumers were already doing lots of online shopping, so this rise was to an extent predictable, just not in the almost-instant time frame we saw it happen.
The events of 2020 accelerated several global trends in commercial real estate. The growth of the industrial and logistics sub-sector was no exception.
The pandemic changed the game for businesses which were traditionally store front channels for commerce. Grocery stores, which fared well during the pandemic, previously had a low penetration of the online market, and as such needed to be smart about their supply chains. The traditional model of import/supply on a “just in time” basis was put under pressure by restrictions of global movements. Stock, in particular fresh food and produce (let’s not even talk about toilet paper), was under threat from perishing while on the road. Delivery capability was ramped up, opening hours changed, new people hired, suppliers changed, product lines cut to best performing brands – the response was phenomenal.
Non-food stores with an immature online presence faced a greater challenge, fashion in particular finding themselves with a vast oversupply of stock: consumers sitting at home weren’t buying new clothes. There was an inevitable focus around comfort at home, firstly to get the home office set up while at the same time creating leisure space for an escape. These businesses needed the distribution capability to deliver goods to the end consumer in their homes in order to continue trading and, for some, to ensure they navigated through the global crisis. It became a case of survival of the fittest. Ultimately, businesses needed to cope with this in all aspects, from production to consumption. Many shortened their supply chain where possible, giving those businesses the flexibility to react to demand and to enable them to service their customer.
Now, you can buy a car online or even scan your living room using high-end augmented reality applications on a tablet or smart phone to see how that new sofa would look or fit in.
This trend is set to continue into 2021 with consumers having been somewhat forced into becoming much more comfortable with the online shopping experience. In fact, most are now accustomed to the convenience of it. Businesses too are now wary of the threat of a resurgence of the virus and are therefore reviewing their supply chains, making them shorter and smarter. Sanne is seeing that reflected in the market for industrial and logistical assets.
At the end of 2020 Sanne’s Real Assets team saw several investment managers re-focus on the sector and launching new platforms specialising in the asset class or extend their allocations to those assets. So, what are the challenges lying ahead for these assets and their managers?
Undersupply: The strong demand continues to surpass the supply of good quality assets. This in turn is compressing yields and inflating prices.
Suitability: Automation with robotics and other artificial intelligence technologies will be a focus for some tenants looking to manage the cost of human capital in their supply chains. The strong bargaining position for some tenants is requiring significant undertakings from landlords with extended rent frees/fit out contributions.
ESG: One of the world’s most popular acronyms will continue to play a part in the future development of these assets. There is an increased focus not only on sustainability vs the energy requirements of tenants, but rather a new perspective of the working environment and employees’ mental health and wellbeing. There will be pressure on tenants’ businesses to be more environmentally and socially aware of their operations. This will no doubt have implications for industrial landlords. The market is already seeing downward pressure on values of assets which have been assessed as poorer performers in a zero-carbon world. Investors are looking forward to having their own targets of becoming carbon neutral at the forefront of their minds.
It is still early days in terms of data available, but companies will no doubt see this become a major consideration in all real assets in the near future, not just industrial assets.
Execution and competition: Execution risk is not a new challenge. Motivated sellers want a buyer that can act fast. Buyers need to be able to do this to secure off market deals at the right price or risk losing the deal to a competitive process. Having capital in hand, a familiar structuring option and a team of trusted partners will be key for buyers in order to pick up the assets they want for their portfolios. Tenants are setting up their own distribution chains. Alibaba for example, has its own logistics division and having gone from an online giant to a behemoth in 2020, they have considerable buying and bargaining power.
There’s currently no sign of demand for these assets abating.
Sanne’s international Real Assets team has vast experience supporting clients in acquiring, developing, financing, leasing, operating, managing and selling real assets covering all major asset sub-sectors. We combine the capability, cross-sector insight and global track record of our infrastructure and real assets professionals, so you can act and invest with speed and confidence.