Short-term volatility increases as leasing activities were disrupted in the second half of Q1 due to national lockdown. Meanwhile, the expiry of short-term leases signed during the previous quarter and relocations by e-commerce platforms to self-owned facilities in Chengdu and Hangzhou further exacerbate the situation. As a result, logistics net absorption turned negative at 129K sq. m in Q1 2020.
However, with China ahead of the global pandemic curve, logistics activities have begun to normalize evident by the Logistics Prosperity Index bouncing back from 26.2% in February to 51.5% in March. To address the inconvenience of site inspection caused by travel restrictions, some landlords have established online site-tour platforms to facilitate tenants’ decision-making process. Therefore, CBRE expects warehouse demand poised to rebound in Q2 2020.
3PLs and e-commerce remained as the major demand drivers in Q1, but fresh food e-commerce and healthcare/pharmaceutical companies accelerated thanks to the change in consumption habits caused by COVID-19. As a result, demand for cold storage warehouses surged in key consumption hubs. Such leases accounted for 8% of total leasing activities that CBRE could track and are expected to increase in the future. Auto parts and electronic appliances companies were also active in Q1, but most of the leases were signed before the virus outbreak. While the impact of supply chain disruption on these two sectors has yet to emerge, any impact on the warehouse leasing market should be manageable.
In Q1, over 790K sq. m of new supply was delivered, most of which in East China. The supply-side disruption caused by city lockdown is likely to be mitigated as local governments urge to restart construction and developers gradually resume work. In 2020, total supply will reach 5.7 million sq. m, up 39% y-o-y, if the effective virus containment continues. Most cities will see 2020 pipeline on schedule except for Wuhan.
Despite quiet leasing activities in Q1, rental growth in Tier I and satellite cities continued to enjoy positive rental growth. In some infill locations in Tier I cities, renewal rents could increase by 10-30% compared to the previous leases. CBRE forecasts full-year rental growth of 2-5% for tier I cities and sub-3% growth for satellite cities. However, rents in mid-western cities and a few northern markets will experience downward pressure due to short-term oversupply.