In its fourth instalment in a series of reports about Covid-19 and the implications for logistics real estate, Prologis Research looks at customer resilience amid high economic volatility and concludes that diversity of the company client base is a key factor in insulating the portfolio in turbulent market conditions. Prologis’ own logistics real estate customer base comprises companies that are both benefiting from and being challenged by sudden shifts in behaviour, with net outperformance.
The report highlights that March US retail sales by category, when weighted by logistics real estate industries, outperformed by 730 basis points, declining M/M by -1.4 percent versus -8.7 percent for total retail sales. Sales data per customer category shows that 60 percent of logistics retail customers experienced growth as of March 31, 2020 while 40 percent saw revenues decline. March retail sales for Europe are not available yet, however, Prologis Research anticipates similar trends in Europe.
The report identifies at-risk segments where new behaviours have created significant challenges in some industries. In total, identifiable direct logistics real estate exposure to the most hard-hit industries is small, at 3-4 percent of the customer base (auto sales, travel/tourism/conventions/entertainment, restaurants, department stores, aerospace/oil and gas).
Prologis Research has divided the Covid-19 impact into three phases: the Stay-at-Home Economy, the Recovery, and the New Normal. In this paper, the focus is on the first two phases and these are connected with key trends that could lead to either increased or decreased logistics real estate depending on customer industry.
- In the current Stay-at-Home economy, demand is surging in large customer industries such as food and beverage, diversified retail, consumer products and transportation/ distribution.
- Economic weakness and shelter-in-place are set against new sources of demand. This sudden shift has resulted in a demand surge across certain industries, with an emphasis on the crucial role that logistics real estate plays in everyday life.
- New sources of demand are being driven by stockpiling, medical support, inventory building, office and school closures and limited mobility.
- As of this writing, Prologis’ proprietary data reflected a double-digit increase in proposal and lease generations (leading indicators of lease signings) in the U.S. and Europe (mid-March through early April). In spite of the disruption, the vast majority of customers—roughly 95 percent across the globe—remain at least partially operational.
- In the Recovery stage, those customers who were able to adapt to new patterns of consumer behaviour should increasingly focus on optimizing their supply chains for the “new normal”, including a re-assessment of ideal inventory-to-sales ratios. Customers that serve essential and basic daily needs historically have outperformed in terms of retail sales growth during recessions.
- Recovery: In past recessions, retail sales across logistics real estate industries outperformed by 330 basis points against total retail sales growth.