Has industrial passed its peak?
Warehouse owners and developers are facing fresh challenges as industry bellwether Amazon puts the brakes on its years-long expansion drive, but they have played down unease that the market has peaked.
After posting a $3.8bn (£3bn) net loss for Q1 this year, Andy Jassy, chief executive of Amazon, said the online giant is “no longer chasing physical or staffing capacity”, turning its attentions instead to improving cost efficiencies in its fulfilment network.
Although Amazon’s strategy appeared to be skewed towards the US market, it drove down share prices at some of the UK’s biggest listed industrial players (see chart) after the markets opened on 3 May. FTSE 100 player SEGRO’s share price fell by some 10% during Tuesday’s trading.
Despite this, some industrial developers have stayed upbeat that their pipelines will deliver profits as expected. In Tritax Big Box’s trading update this week, the REIT highlighted that it is “on track” to deliver 3m-4m sq ft of starts this year and that rental growth should help offset cost inflation.
Ekaterina Avdonina, chief executive of KKR-backed industrial developer Mirastar, which has a 1.5m sq ft pipeline under construction, told EG there had been an “unjustified” market overreaction to Amazon’s stated aims. “There are a lot of macro risks that we are more concerned about, such as the rising interest rates, inflation and dropping consumer confidence,” said Avdonina. “Amazon has actually been slowing down for a while, if you look at the data – the market has delivered the best performance we have ever seen, without Amazon. To me, that is the sign of a more mature market – and there are a lot of other large e-commerce players, manufacturers and suppliers that do not rely on Amazon’s network.”
Avdonina said the fact that Amazon is cooling its bricks-and-mortar tactics will not affect Mirastar’s investment strategy. “The slowdown from one occupier, from our perspective, will not have a profound effect on such an established market,” she said. Even if those macro risks do create a slowdown, it will be from “extraordinary” peak levels, said Avdonina. “If occupier demand dips by 10-15%, that is still way above the 10-year average,” she said.
“Considering vacancy rates in the market, which are close to 2%, we are in a very different place. Weirdly, it could even be a good thing for stabilising the market – maybe it would cool off construction cost inflation.”