The Colliers International Industrial Research and Forecast Report for H1 2020 found that unlike the GFC, where rents contracted between 9% and 25% in the prime market and 15% and 25% in the secondary market, the recent growth in demand for transport and logistics and its key role in keeping necessities of Australians in supply is underpinning the sector.
“As a result of the COVID-19 pandemic, there are going to be tenant casualties who are unable to trade through this period and there will others who experience a significant pick-up in business revenue,” said Malcom Tyson, Managing Director, Industrial at Colliers International.
“Tenant covenants will be increasingly scrutinised going forward and length of WALE will never be more important as the flight to quality thematic plays out.”
“While certain locations may see a fall in rents and a rise in incentives, we do not expect it to be to the same extent as we saw in the GFC. Likewise, we do not expect yields to blow out by 150 basis points as they did in the GFC.”
“While there may be some softening of yields for secondary assets as risk becomes priced in, core assets with strong businesses within will remain highly sought after by both domestic and global capital and yields will remain firm.”
Luke Crawford, Associate Director, Research said, “The fundamentals for industrial and logistics property remain sound over the long term and as a result the sector is expected to be less impacted than others through this period.”
“With the exception of population growth which will take a hit in the short term as net overseas migration drops significantly off the back of border closures, the other key drivers of infrastructure investment and growth in e-commerce will continue to remain strong in the current environment.”
“The value of e-commerce has increased exponentially as a result of COVID-19 and the take-up of online retail will gain market share on brick-and-mortar retail sales, as consumers are forced to buy online and others who have never used online platforms will become comfortable with this form of shopping.”
“Highlighting the persistent demand for online retail goods due to global lockdown restrictions, Amazon in the US have hired 100,000 employees to cater towards its spike in demand for e-commerce goods. In Australia, we have seen retailers shift some of their staff to online fulfilment as they try to keep up with demand. “
Colliers’ reported that investment volumes have weakened over the first quarter of 2020, with investment activity in the quarter being at its lowest level since 2010. The weaker activity is the result of several institutions and corporates holding off on their divestment mandates as they wait to see the impact on headline investment metrics such as cap rates, IRRs and value per square metre rates.
“In spite of uncertainty, there remains substantial levels of capital seeking to expand within the Australian logistics sector, with private investors recently becoming more active, particularly across the East Coast Capital cities,” said Gavin Bishop, National Director, Industrial at Colliers International
“Institutions remain focussed on increasing their assets under management; however, their attention has shifted towards prime assets in core locations with sound covenants and long WALEs.”
“Recent events have forced groups to reassess risk and chase security and subsequently, the flight to quality will persist as the distinction and pricing between grades, locations and covenants comes to the forefront.”
“Given the defensive nature of industrial and logistics property, coupled it being a more liquid asset compared to other property asset classes given the lower price point, industrial property is expected to remain in favour with investors in 2020.”
According to Colliers Industrial Research and Forecast report, 2020 was expected to be a record year in terms of demand. In 2019, approximately 3.8 million sqm of industrial space was leased (1,000sqm+), representing the second highest annual total on record.
“While enquiry levels remain healthy in most markets, demand has shifted towards defensive occupiers including food and beverage retailers, e-commerce groups (including fast moving consumer goods), transport and logistics providers, data centres and cold storage occupiers,” said Malcom Tyson.
“Other businesses who were previously in the market for new or expansionary space have since placed these decisions on hold as they determine the impacts of COVID-19 on their business. “