Logistics Sector: Covid Impact & Opportunities

Modest Absorption Amidst The Covid-19 Uncertainties Hints That The Fundamentals Of The Industrial And Logistics Sector Is Strong And Set To Take A Fast Revival Route. Jll’s Latest Report Indicates.   The Indian economy was facing some turbulences since the 3rd quarter of 2019 as industrial production fell, especially in auto and related sectors, rising unemployment and growing uncertainties of NPAs among banks, etc. continued to plague the market. However, the economy was recovering back in 2020 as the central government and Reserve Bank of India took various steps to support recovery and growth. This recovery however witnessed a second wave of turbulence by the end of 1st quarter of 2020 driven by the global pandemic. Within the industrial sector, manufacturing has had the largest impact. Electronics and automobile segment, due to its dependency on China for critical component and preCOVID-19, sector slowdown witnessed most organizations stopped operations. On the other hand, ecommerce has been one of the beneficiaries, along with pharma and warehousing sector. Factors leading to this are due to the lockdown where consumers are diverted towards online transactions for procuring daily essentials.   Supply Scenario The lockdown response to prevent the pandemic in India began at the last week of the first quarter of the year (1Q2020). This resulted in having some impact on the supply addition of new warehouse spaces in the warehousing market. There has been a contraction of approx. 15% in new supply in the first quarter of the year (1Q2020) against the previous quarter (1Q2019). However, on a closer look, the quarterly new supply addition is higher than the average quarterly new supply addition of first quarter in the last three years (2017–2019) which demonstrates the impact of lockdown has likely not set in yet. Going forward in the next three quarters, the supply is expected to witness:

1. Delay of project delivery due to labour shortage over the next 1-2 quarters post lockdown
2. Projected supply of speculative spaces may be delayed by a quarter or two

  Demand Scenario The quarterly demand has relatively been lower than the previous first quarter of last three years (2017 – 2019) demonstrating a contraction of approx. 30%. While the second quarter demand is expected to witness limited activity, there can be gradual revival in the demand post lockdown as leases and active RFPs that were in various stages of closure may be executed. Increased enquiries from e-commerce and 3PL players are expected exploring in-city spaces among other options. Grade A properties are expected to witness preference from occupiers due to adherence to additional safety norms The pent up demand and project closures might be pushed by 2 quarters and Q4 will be an interesting quarter to watch out for. The fundamentals remain strong and there is opportunity for India to capture the pie of manufacturing demand in case companies re-plan their Global Supply Chains from BCP point of view.   Rental Scenario Minor correction in rental in short term due to cost pressures and uncertainty in demand. Rental discounts/ deferment or sub leasing rights may be expected by tenants In the long term, enhanced Facility Management with higher regulatory compliance may result in higher CAM Charges.   The impact of the lockdown is still evolving, but the impact on the overall annual supply of new warehouse spaces, though eminent, needs further assessment as it evolves