Covid-19 and the European logistics sector

Although the logistics sector is not immune to the economic pressures caused by the Covid-19 recession, it is well-equipped to weather the worst of the storm.

“There are risks that shouldn’t be dismissed,” warns RICS Economist Tarrant Parsons. “Forecasts for industrial and logistics rental growth and capital growth have been revised down significantly for the coming 12 months. Global trade volumes are forecasted to drop by 20% year-on-year, which would exceed the drop during the global financial crisis. Many occupiers will be affected by this and that will weigh on the outlook for the sector. Nonetheless, the sector does enter this crisis in a position of strength. Once the economic recovery begins to take hold, the structural dynamics that have made it a standout performer in recent years are going to be accelerated.”  

The industry’s recent fortunes have commonly been interpreted as the obverse of woes in the retail world. Shifting consumer behaviours are said to have worked to the benefit of the former at the expense of the latter. This topic formed the larger part of the discussion during last month’s WBEF webinar: Highstreets and the new retail landscape. But where previously, the preference for e-commerce was shared unevenly across generations, lockdown conditions in Europe may have served to equalise its appeal.     

“People have adjusted to new way of shopping,” says Tia Van Beek, Director of Transactions with Principal Real Estate Europe. “Many who, pre-Covid-19, would not use the internet to shop now do – I’m thinking of my mother, who is 80. The Green Street Commercial Property Price Index shows industrial at
-0.7%, retail at -15%. This gives you an indication of the shift from an investment perspective.”

Guy Douetil, EMEA Managing Director, Hickey & Associates builds on the theme. “What we’re seeing is e-commerce becoming supercharged. Across Europe, sales have increased significantly. The UK is the largest market. It has doubled in size over the last five years to £180bn (€200bn) in 2019 – twice the size of the French and German markets. But every country will see growth moving forward. The toothpaste won’t go back into the tube.”

Another widely predicted structural change resulting from the crisis is the repatriation of industrial capacities and a move from “just in time” to “just in case” stock inventories. Douetil cites the example of France: “Finance Minister Bruno Le Maire said back in February that he wants an accelerated consideration of reshoring, particularly for critical industries. I think we’ll see more of that rhetoric right around the world.”

A general upsurge in nationalism has been evident across the continent in recent years. Susanne Eickermann-Riepe, Partner of Real Estate Advisory with PwC in Germany notes that many in the industry have been mindful of how this might impact supply chains. “The sector was already discussing ‘glocalisation’ instead of globalisation. It has been possible to show how fragile global value creation systems can be, and how critical points have been kept going for years by fire-fighting actions.” Such actions have taken on a new and urgent intensity as the pandemic has taken hold.

The likely consequence for cities will be greater demand for logistics hubs in densely populated urban centres. “That last mile delivery piece will be hugely important,” says Douetil. “In megacities, I think there’s a big problem in terms of the supply of potential sites.”

Tia van Beek concurs, and suggests regeneration of post-industrial districts could provide a sustainable solution to demand. “There’s an opportunity for older districts on the outskirts of cities to fill that demand. Instead of unlocking new ground, it would be very worthwhile to look at these regions. This is the “E” in ESG: let’s use brownfield instead of greenfield.”

Expanding on the ESG theme, Eickermann-Riepe notes that, “this crisis is a social crisis. If you look to research highlighting what investors want, you can already see that the social reputation of companies is becoming more important.”

If the sector’s prospects look relatively bright, that is because the disruption caused by the crisis, while significant, seems unlikely to alter the established direction of travel. Indeed, it may serve to increase the journey speed.