The world’s biggest logistics developer Prologis warns COVID19 is on course to cause a recession, and has called for more inventories to build resilience amid ‘extreme uncertainty.’
Economic activity has come to a near-standstill in the hardest hit markets, said a new report by the US-based company entitled, Logistics Real Estate Amid the COVID-19 Outbreak. It comes amid unprecedented measures by governments to curb the spread of COVID19, which is already dampening economic activity.
Demand for logistics real estate is going to be hit due to the slowdown in movement of goods, although the depth of the downturn is not yet clear, the report admits. The movement of goods has quickly declined since COVID19 became an international health emergency and Prologis expects confidence in logistics investments may ‘pause’ amid the present uncertainty.
The firm predicts demand for logistics to rebound thanks to a boost in demand for e-commerce – for which warehouses and distribution centres are vital.
‘On the ground, we’re seeing activity from those who serve essential daily needs via e-commerce and rapid replenishment to stores, such as food/beverage, consumer products and general retailers,’ the company said.
The report focuses mainly upon the US market, but with European countries implementing similar measures - or stricter ones in the case of Italy - to contain the spread of coronavirus, the impact upon economies in Europe is likely to follow a similar pattern.
Prologis predicts the logistics sector is resilient to fundamental changes being wrought by COVID19. Factors protecting the asset class in the long-term include structural demand drivers built upon higher service level expectations, higher barriers to new supply and a disciplined development community, and sustained strong market conditions leading to favourable lease terms.
‘Uncertainty dominates the short-term outlook,’ said the company. ‘Recessions translate to less overall economic activity and delays in customer decision-making for all forms of real estate, logistics included. We’ve identified several potential positive offsetting factors exclusive to the logistics sector. However, it will take time to determine their relative importance, overall impact and absolute performance.
Other asset classes at risk of long-term damage to growth are office and retail, cautions Prologis, because of consumers’ flight from physical retail – a trend which the virus is accelerating rapidly – and people adopting home-working, as evidenced by images of deserted streets and public transport networks across Europe.
A Prologis spokesperson said: ‘Logistics is well-positioned to weather changes in real estate capital markets. While long-term leases counter volatility, capital flows may slow due to financial market volatility and the subsequent denominator effect.
‘Yet tempering forces do exist. Investors have been under-allocated in real estate, especially logistics real estate. Interest rates have fallen and are likely to remain low. As it relates to fundamentals, logistics on the whole is better-positioned than other sectors given the potential boost to long-term demand from inventories and e-commerce. Capital is also likely to favour core assets in strong locations, demonstrating a flight-to-quality.’