Occupiers in logistics sector adapting to changing market conditions

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The Indian real estate sector has been impacted in several ways from the ongoing crisis. While the sector was adapting to the structural changes, policy reforms, and the liquidity crisis, it is witnessing a new set of challenges in these unprecedented times. However, interestingly, the logistics sector has proved to be relatively resilient to the challenges posed by the outbreak of COVID-19, majorly due to occupiers such as e-commerce companies offering essential products including food and grocery items.

It is well-established that growth in the e-commerce sales results in growth in demand for logistics space, whether large hubs (or fulfilment centres) or small last-mile warehouses. An increase in e-commerce adoption rate will accelerate this need for logistics space. However, the nationwide lockdown that called for restrictions in business activities including construction, triggered by the outbreak of COVID-19, may lead to delay in completion, hence, impacting scheduled timelines for delivery of logistics assets.

Short-term leasing trend setting in

The delay in delivery of logistics assets is likely to pose near-term challenge for the e-commerce players to cater to the expected heightened demand during the approaching Indian festive season starting from October. In order to tide over the immediate requirement, the e-commerce and / or third-party logistics (3PL) operators have been scouting for warehousing space for short-term. For reference, as of May 4 2020, Amazon and Flipkart are actively leasing out warehousing spaces for short-term to cater to growing demand from consumers.

The near-term demand from the e-commerce players is proving as a win-win proposition for select tenants in manufacturing sector. These tenants, especially in auto and electronics manufacturing segment, are unable to utilise their existing warehousing space optimally amidst a tepid business environment. Consequently, such tenants are exploring sub-leasing options wherein they can lease their unutilised space for a short period to other tenants. Such sub-leasing strategy meets the objective of e-commerce players and simultaneously enables manufacturing players to ease out the rental-cost burden on them.

In-city warehouses preferred

With social distancing becoming a new normal, and greater dependency on e-commerce for food and grocery items, quick delivery of the product to the customer assumes more importance than ever for the e-commerce players. Hence, they may consider securing warehousing locations close to their customer base. A probable solution to optimise operational costs and improve delivery time could be ‘in-city warehouses’. Over the next 12 months horizon, we may witness occupiers’ preferences shifting towards multi-level warehouses within city limits.

With robust demand, the logistics sector was supported by strong fundamentals prior to COVID-19 crisis. Further, the pandemic will bring about a change in customer buying pattern at least in short term in favour of e-commerce. This is likely to accelerate the existing trends of increased online penetration rates, expansion of online grocery, omni-channel retailing and the integration of technology into warehousing. The current ongoing crisis is highlighting the critical importance of logistics real estate, and the sector is placed well to respond to the post COVID-19 recovery.

 


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Diksha Gulati

Manager

Mumbai

Diksha has nearly 5 years of experience in the domain of business research and analysis. Prior to Colliers International, she has worked with other International Property Consulting firms in Research services in various capacities. She has also worked with a reputed market intelligence firm providing powerful solutions to enable decision-making with conviction.

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