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Bluer skies for blue chips? Large corporates lead covid shakeout

By Henry Stratton – 08 Jul 2024

It’s not often that 0.1% GDP growth turns out to be an upside surprise – but 2023 was a tough one for everyone from consumers to corporates. The year, however, ended on a much firmer footing than might have been expected at the start – with energy costs down and inflation receding, setting the ground for an improving outlook through 2024.

What’s clear is that two years on from the extreme disruption of the pandemic, a corporate shake-out is taking shape. Clear winners are emerging. While across the economy as a whole insolvencies remain at an elevated level – partly as a result of companies struggling to adapt to both the post-covid environment and current financing costs, large bell-weather companies are a bright spot, and many continue to perform strongly. We expect these blue chips to lead the recovery.

We track a ‘basket’ of leading UK and international companies that are core logistics occupiers (many of whom utilise our buildings). Many have done an impressive job of mitigating cost pressures. EBITDA margins remain healthy and are forecast to improve over this year and next.

Drilling down further:

  • Leading omnichannel retailers have emerged and continue to invest in their networks to make the best use of both their logistics and retail space. Tech investment across warehouse networks is a focus, as it both reduces the cost-to-serve and facilitates increased throughput. M&S and Next, for example, are expected to see EBITDA margins improve by at least 50bps in 2024, according to JP Morgan.
  • E-commerce performance is improving – driven by gross margin recovery from lower levels of discounting and normalised inventory across the market.
  • Global integrators (such as Maersk and CMA CGM) look set for another period of strong financial performance. With balance sheets already in good shape following windfall profits from the pandemic, this could promote further consolidation in the 3PL market and evolution of warehouse networks (see earlier article).Maersk, for example, raised full-year 2024 guidance for a second time in June, citing continued strong container demand, ongoing Red Sea re-routing and the impact of port congestion in Asia and the Middle East.

It’s no surprise, therefore, to see that large corporates are currently underpinning warehouse demand, particularly through large build-to-suit pre-lets. While decision-making is still taking time, the market has already seen some notable commitments – with more to come. At the end of Q1, 14.6m sq. ft was under offer (up from 9.8 m sq ft in Q3 2023).

Network evolution is an ongoing multi-year process – and, as we move through the year and beyond, there’s scope for activity to pick up further. Three interconnected factors will be important:

First, the definitive election result should support general business confidence and inbound UK investment.

Second, continued improvement in the macro-economic environment should support underlying demand drivers for our sector, such as consumer spending.

Lastly, financing costs should improve gradually with the above.

The latter matters because of the levels of capex required for any real estate commitment. Fit-out costs, for example, now often run into the millions – if not tens of millions. Leading occupiers have strong balance sheets and widespread access to capital, which is allowing them to selectively make new real estate commitments. For others, the cost of capital is proving a challenge as available sources are more limited and financing costs are relatively higher.

For companies of all sizes, convincing the CFO and board to sign-off on the capex requirements associated with a new real estate commitment is challenging currently (no matter how strong the strategic rationale). Yet companies clearly need and want to further evolve their logistics real estate networks. More supportive capital markets, alongside political stability and an improving economy can only help.

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