_From unloved cousin to favourite uncle

Once the unloved cousin of office and retail property and consequently under-represented in many institutional portfolios, industrial and logistics property has shot to prominence on the back of shifting consumer spending patterns and the rise of online retail. Seven consecutive years of double-digit total returns from 2013-19 attest to the strength of the sector, with investors effectively re-rating it as a more stable and resilient source of income than it has historically been perceived to be.

Accelerated shift in consumer behaviour

Now, as the economic sudden stop caused by COVID-19 takes its toll, property investors will begin assessing the impact on their holdings and recasting their views on the outlook. This will inevitably prompt a reappraisal of the resilience of different sectors, with the virus resulting in an unwanted real time stress test to help reshape those views.

The impact of the current climate on the underlying demand base of each sector offers clear pointers to the conclusions that will emerge. And for industrial and logistics property, those conclusions are likely to reinforce its relative strength.

Unlike other property sectors at the heart of our modern services-based economy, its performance is less contingent on facilitating the gathering and interaction of people and teams, and more reliant on underlying consumer demand trends that will persist regardless of the current environment.

Restrictions on movement and forced temporary closure of many retail outlets are reinforcing the existing shift to online, helping the sector to navigate the current challenges and also resulting in an accelerated shift in consumer behaviour that will have enduring effects.

Resilient but not immune

This is not to suggest that industrial property will be immune to the COVID-19 crisis. With unemployment rising and household incomes under pressure, many tenants will be facing reduced demand, and so in the current climate the resilience of industrial property will vary at asset level partly depending on the types of tenant in occupation.

With spending on groceries holding up well, along with healthcare and industries exposed to government spending, assets suited to these types of demand will be more resilient. On the other hand, those exposed to discretionary retail and manufacturing may be more challenged.

Urban logistics opportunity

Looking ahead, the shifting pattern of retail spending, reinforced by the impact of COVID-19, is likely to result in a reduction in the total footprint of retail space in our major cities in coming years. This offers an opportunity to grow logistics stock in urban locations to cater to growing demand and cope with the pressure for faster delivery times.

In recent years, the growth of the sector has come largely through the development of large-scale distribution centres in strategic locations on the edge of our major cities. However, the development of other global cities has revealed an increasing need for smaller scale distribution centres in urban areas closer to the centre of cities. This trend is yet to fully play out in Australia, and while it is challenging to grow stock in urban fringe locations in the face of competition from other uses, the current crisis may provide the opportunity to further adapt the sector through the re-purposing of retail spaces to cater to evolving consumer preferences.

For further information please contact:

Ben Burston
Partner, Chief Economist
+61 2 9036 6756
Ben.Burston@au.knightfrank.com