The transformation of the warehouse – casting an eye on emerging trends

Covid-19 has accelerated the growth of online retailing, crippled the hospitality sector and thrown the future of the office into question – none of which has left the commercial property sector optimistic.

The headline numbers of South Africa’s listed REITs hides
variability. While the industrial sector is performing reasonably well, retail
real estate, particularly shopping centres, has taken a big hit.

The greatest uncertainty lies within office space. Its
future depends on how the pandemic plays out and whether employees will return
to work and when. Currently, large office blocks in prime locations that are
occupied by banks, law firms and financial companies are standing empty and
estimates for capital value are sitting at 20% to 25% in the 2021 range.
Property trades above R50 million are tepid and if there are no sales with most
large assets held by institutional owners, material drops in value will go unnoticed
for a long time as valuers work on historical values.

Panicked property investors and speculators
looking to snap up bargains may also have to wait a while says Rael Levitt, CEO,
and founder of Inospace.

One must remember that previous
commercial-property busts in South Africa were all triggered by high interest
rates that led to a wider tightening of credit availability with ramifications
across the rest of the economy. But this time, financial regulators are more
relaxed and interest rates are historically low. Several banks are exposed to
commercial property, but they believe that their loans to value are in check
for now. A lot will depend on cash flow and whether tenants pay rent.  For
the short to medium term, there will be little price slashing and discounted

One commercial property sector seems to have held up this year: industrial. Historically, this sector was easy to dismiss. Many investors used to think of it as ‘four walls and a rood that you hope does not leak’ – in other words, highly commoditised. Yet, the sector is changing rapidly in a transformation that is exciting to watch. The industrial sector comprises of many sub-sectors and markets. While there has been a traditional focus on big-box logistics, self-storage and multi-let industrial are doing well.

The first task for many investors is to decide on which end of the supply chain they want to be. Inospace, with its wide range of space options has settled on mass consumer markets in South Africa’s major cities, rather than serving large retailers and wholesalers who require distribution centres” comments Levitt.

In South Africa, the rise of ecommerce and online retailing was always treated with scepticism. It has taken decades for ecommerce to eke out a double-digit share of retail spending in the US, let alone South Africa, with its poorer population and so fewer online consumers. But lockdown has turbocharged the shift. Accelerated online delivery, ecommerce adoption and higher inventory levels have generated additional demand for most of its industrial space categories.

Inospace is tracking growth across several demand categories of space, including warehouses and distribution centres, storage facilities and urban, last-touch facilities, among others. The company is also analysing the impact of the coronavirus pandemic on business parks, as well as how the situation has affected the industrial sector. Certain segments of the business, such as mid-sized warehouses measuring 2 000 to 5 000 square metres, are price sensitive and currently commoditised. But other sectors, such as micro-industrial units and business storage, are seeing price growth. Top of the list is the growing demand for smaller warehouses and micro-distribution centres as consumer buying habits shift, and manufacturers and retailers adapt to changing demands. 

The pandemic may also make the multi-let
industrial warehouse business more attractive. As tenants struggle to pay rent,
bad debts are rising. But unlike the slump a decade ago, pre-pandemic
utilisation rates were high, and ecommerce increases the demand for space, as
online retailers must stock a wider variety of products. 

The future is likely to see multi-let industrial
parks ever closer to large urban or suburban areas, as online retailers strive to
shorten delivery times. Until recently, the trend was constrained by a lack of
land and labour. Neither city officials nor workers looked favourably on
warehouses. The pandemic looks set to change that. The blight on shops and
hotels will free up space, while unemployment will make logistics jobs more

“Inospace wants to burnish the industry’s image. One just needs to look at one of Inospace’s 26 business parks, which saw the conversion of B-Grade industrial buildings into a branded park with quirky slogans decorating the space and we-work style office areas with receptions. Inospace parks include storage, light manufacturing, creative industries, a shared business hub, smart lockers, and coffee shops. Parks are solar-powered and surrounded by shared spaces. A few decades ago, abandoned industrial warehouses in places such as Woodstock in Cape Town became trendy places to live. Those of the future may be alluring places to work” he says.

The key message here is that Covid-19 pandemic and the resultant economic downturn is bringing change to the broader commercial property marketplace but has raised commercial property industry growth rates. Many of the goods coming through Inospace’s business parks, that make modern life possible, will never see the inside of a shopping centre. But they must still be manufactured, stored, or distributed somewhere. The increased demand for their parks and their spaces demonstrates how much industrial real estate has grown and can be expected to continue flourishing into the future as consumers change their buying habits. 

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