News – Industrial companies need to be prepared for a tricky 2023
Weak economic conditions could put a dampener on leasing activity for large parts of the logistics sector, says Inospace CEO Rael Levitt. Only those landlords who offer specialist services, especially at the top-end of the market to multinational clients, are likely to enjoy sustained demand.
Multinational companies tend to rent logistics warehouse space from those landlords who offer very high ceilings and stronger floorboards than market norms. These warehouses tend to be built from scratch as opposed to being constructed from converted smoke-stack industrial space.
Levitt said an ailing economy, which is at the mercy of the worst rolling blackouts experienced in SA ever, will put inevitable strain on business activity. This along with high inflation and rising interest rates expected to continue into 2023, will trigger a decline in real estate prices, retail sales and higher unemployment levels, he said.
“However, inflation will likely recede by the end of 2023, and well-capitalised investors will still be able to finalise deals,” said Levitt.
Inospace owns and operates last-mile logistics parks in Cape Town and Johannesburg.
Using last-mile logistics properties enables retailers to sell more goods by transporting them on fewer trucks and with fewer trips which saves on input costs such as diesel.
Levitt said industrial property leasing activity would moderate as most occupiers delayed expansion plans and the post-pandemic need to hold additional inventory dissipates.
“Despite the slowdown, diminished demand will keep up with limited new supply of industrial space in 2023, record-low vacancy rates and solid rental growth,” he said.
Following two years of living through the Covid-19 pandemic, 2022 has not brought much respite from challenging times. Global uncertainty continues to be felt through rising inflation and interest rates and his will filter into the real estate sector, dampening demand for industrial and logistics properties, according to Levitt.
SA’s industrial and logistics leasing activity would decline by between 5% and 10% in 2023, even though, for the fifth consecutive year, more industrial space will be taken up than vacated. Vacancy rates are already at historic lows and will increase just slightly in 2023 as demand moderates, he said.
“Nationally, industrial vacancy rates currently sit between 5% and 6%, and in segments such as big-box logistics, vacancy rates are below these historically low levels,” he said.
A decline in industrial leasing activity would lead to a drop in asset values and investment volumes. The rapid interest rates rise in 2022 would then increase capitalisation rates; the measure of a property’s value in proportion to its projected cash flow, by 75 to 150 basis points in 2023.
“It’s a relentlessly difficult time for South African business. With so much uncertainty, we must be resilient, keep costs low and mistakes at a minimum,” said Levitt.
“As increases in capitalisation rates translate into lower returns on investment, asset values across all real estate classes will decline in 2023, and the industrial property sector is not immune to higher interest rates and lower valuations,” he said.
Debt financing would still be available for investors with strong balance sheets and high yielding properties, but the cost of servicing debt would make it increasingly difficult for many to obtain commercial property funding.
The main factors that would support demand for industrial space in 2023 would include e-commerce growth, supply chain transformation and location optimisation.
Demand would also be led by third-party logistics providers as companies outsourced at a greater rate to avoid a lack of inventory, labour shortages, rising transportation costs and other supply chain challenges.
“E-commerce will likely continue to serve as a tailwind for the logistics and industrial warehousing sectors as well as the last-mile distribution facilities for the next decade,” Levitt said.
Industrial performance metrics will depend on demand and supply dynamics. Higher building costs and electricity shortages will lead to far less building activity in the new year, which would be positive news as vacancies in existing buildings reduce in some instances.
Demand among e-commerce companies for warehousing space is mounting. The is indicated by the likes of Amazon’s plans to opening new offices across the country in 2023.
But in terms of the size of each office its opens and the position, Amazon will be cautious in SA as the company struggled with massive warehouse overcapacity and slowing demand from the frenetic pace of 2020 and 2021. In May, Amazon said it planned to sublet 3-million square metres of warehouse space. It also closed facilities and delayed or cancelled pending projects totalling some 2.4-million square metres.
Levitt said logistics properties should fare better than many other subsectors of commercial property, given its attractive fundamentals.
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