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Delving into labour market demographics with David Thame

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Today, warehouse development is all about numbers. But which numbers? David Thame reports on new thinking in the property business.

Demographics is the big – perhaps the biggest – issue in logistics and warehousing. The local labour market can make (or screw up) the best recruitment plans. The ‘within-reach’ population matters enormously to fulfilment centres whose basic functions are increasingly hard to distinguish from those of shops. 

The property industry gets it. The developers, landowners and investors who build and pay for the UK’s big box and urban logistics warehousing understand that 3PLs and retailers look closely at the demographics before selecting a location. But are they responding in ways that will help deliver the warehousing and fulfilment centres the UK needs? That is a tougher question to answer with certainty. 

On the map

Once, a decade or so ago, the property industry selected warehouse locations roughly like this (and I’m not joking). A map is found. The rough centre of the country has a big red line drawn round it. Within this area motorway junctions are identified. Next to motorway junctions, large flat sites are identified. And that’s it. Job done. In other words, what determined warehouse locations was geography mixed with topography. 

Having identified the locations, the next step was to do some maths and produce a development appraisal. The cost of the land, plus cost of construction, plus at least 20% profit, divided by floorspace equals rent. If an investor is attracted by the kind of return this equation indicates, then bingo. The result is a warehouse. 

Today, ten or more years into the online retail revolution, things are a little more complicated for developers, but demographics is still a bit-part player. The major change is that motorway junctions, being both fairly scarce and either fully developed or not available for development, are now less of a priority. Good A-roads can work just as well. And the rough centre of the country is no longer as important as drive-times to the main centres of population. But otherwise, the same appraisal-based approach to warehouse development is still king. 

So, what’s going on? If distributors, retailers and the supply chain are obsessed by demographics, why isn’t the property industry? The answer is that parts of the property industry are genuinely interested in demographics, and other parts aren’t. The investors – the people who fund new development, and whose interests are closely aligned with the occupiers who pay them rents – are much the most enthused.  

James Clements, partner and head of midlands logistics & industrial, with property consultant Knight Frank, explains: “Investors are absolutely interested, demographics is one of the first things they ask about a potential development. They ask about the labour force and about the scope for energy/power connections.” 

“What turns them on is the number of chimney pots, the number of people living and working in an hour or half-an-hour’s drive from the location, data on local labour force skills and labour costs. They are looking for a good pool of labour but also for higher skilled workers, people with IT skills, because they understand that warehouses today involve a lot of sophisticated automation.” 

Clements insists the property industry’s moneybags are seriously tuned-in to the logistics’ sectors demographic needs. “It really does make a difference. Present a site to investors without the right labour market demographics and you just can’t secure the funding,” he says. 

There is no direct relationship between good demographics and the investment yield (the return) investors make on their investment. At least, not yet. But Clements says it makes an enormous difference to whether or not a scheme gets funding in the first place: “Demographic data effects how willing investors are to get involved. The first question they ask is: is this scheme financially viable? Then they ask about labour market demographics and electricity connections. And there is no doubt they are turned off by development opportunities without the right labour market demographics.” 

It's all about labour

Tim Crighton is partner for European logistics & retail at property consultancy Cushman & Wakefield. He agrees with Clements that property investors light up if the conversation turns to demographics. 

“We see a huge appetite from investors for demographic data. It is part of a wider interest in community impacts on the one hand, and interest in the location’s labour market profile on the other,” says Crighton. 

“We’re already seeing developers turn away from sites that they might otherwise have chosen because of the labour market demographics. We’re definitely seeing this in the European mainland and we are beginning to see it in the UK, too. The fact is that nobody wants to invest in buildings where the level of available workforce is too small, or the labour pool itself is too small,” he says. 

Areas with super-high employment rates, like some of the Midlands’ top logistics locations, ring demographic alarm bells in the minds of investors. Their concern echoes that of the retailers and warehouse operators who know that they will have to fight for labour in a highly competitive (and increasingly expensive) market. 

The consequence is already apparent. Amazon have chosen locations far from the normal Golden Triangle of Midlands hotspots in an effort to resolve labour demography issues. Crighton speculates that we could see more big warehouse developments in traditionally off-pitch locations and hints that developers and investors are watching the labour market closely for signs of the new development opportunities. One of the hottest could be Swindon. 

“Look at Swindon,” he says. “The announcement that Honda is closing its car plant is obviously bad news for the town. It will cost it 3,500 jobs from the point when the plant closes in 2022. But there will be people who see those numbers and realise that is a large skilled pool of labour becoming available. The result could be that Swindon beats Bristol or Reading to capture warehousing requirements in the M4 corridor.” 

Investors are watching with interest as warehouse occupiers deepen their involvement with demographics. Crighton says his team is working with a number of customers on predictive analytics, working out how various types of stock might be moved to match different customer profiles. Others are looking at warehousing locations in the same way that retailers have traditionally looked at high street locations. “Yes, they want the right workforce at the right price, but they also want to be proximate to the right customers. So, this begins to look a lot more like a retail location choice,” says Crighton. 

Looking ahead

Demographics is now mainstream among logistics operators, and among the investors who take such a keen interest in their needs. But the developers? Obviously they have an eye to what their potential tenants, and their potential funders, want to see, but in general their attention is still fixed on the traditional property appraisal. That means on land cost, build cost, rent and profit. 

That may change if demographics could be priced. That way they would find a way into their appraisal calculations. “But it’s not priced today,” says Crighton.  

Clement adds: “Demographics help a warehouse find a tenant more quickly, I think that’s how developers see it, not as a direct part of the financial equation.” 

Could that change? Crighton says perhaps: “The appetite for omni-channel retailing is growing, so there is an opportunity to price demographics into property. The first step would be to get a bit more discriminating on our pricing generally and find the distinction between sites that are really good, and those that are not.” 

The property industry is like a sausage machine. It cranks out a regular supply of something fairly basic that suits most of the people who buy it. Recalibrating the machine to produce specialist products, or to produce pies and not sausages, is not easy. But if the occupier tenants, and the investors, want to see demographics become one of the major property industry metrics, it is sure to happen. 

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