How will I&L tenants cope with Covid-19?

Short-term requirements arose quickly for supermarkets and their third-party logistics providers, retailers with storage bottlenecks and, of course, medical-related entities. Many of these have now been satisfied or soon will be.

For occupiers that were looking for existing space pre-Covid-19, plans have largely been put on ice, but some transactions that were already in lawyers’ hands are completing. For occupiers looking at land acquisitions or with build-to-suit aspirations, it is largely business as usual, although the inability to access sites to carry out due diligence presents frustrating delays.

March’s quarter day saw most tenants acting quickly to put deferred or monthly rent payment terms in place and further headaches will arise in June, which is likely to show a truer picture of occupier health.

So what changes will this herald? Firstly, occupiers’ medium-and long-term decision-making may be impeded by the uncertainty, while the bold that are willing to renew, regear or sell and leaseback may be met with reticence from those unwilling to make valuation decisions.

The strong fundamentals of the industrial sector should mean it is well prepared to weather the storm

IMRG data shows that ecommerce slowed year on year in the first quarter of 2020 and was at times down week on week. However, the surge in demand since lockdown was implemented has been a boon to online retailing. Some new adopters will continue to shop online post Covid-19 and this increased customer base will translate into the need for more warehouse space.

Supermarket supply chains have also been severely tested and found wanting, largely due to the lack of buffer stock that could be drawn down to service the panic buying. The demands placed on click & collect and home delivery services continue. It is likely, therefore, that supermarkets will look to increase their locally held stock capacity in store, while also potentially reducing the middle mile with more regional distribution centres. Automation to increase pick rate and combat labour shortages presents opportunity, but is of course expensive to implement.

At the time of writing, just under half of big-box construction development has ceased while contractors navigate social distancing. This will cause a blip in the grade-A stock availability pipeline in late 2020/early 2021, but secondhand warehouses rendered available by inevitable tenant defaults are likely to bridge the space gap in terms of quantity, if not in quality.

Overall, the strong fundamentals of the industrial and logistics sector should mean it is well prepared to weather the storm, assuming we head back towards some level of normality in the second half of the year.

Sally Duggleby is head of industrial and logistics occupier advisory at Savills