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Do ‘just-in-case’ supply chains mean the property industry can’t deliver?

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‘Just-in-time’ delivery is being replaced by ‘just-in-case’ inventory in some parts of the supply chain, as Brexit causes disruptions and the surge in online commerce changes retailer and manufacturer needs. David Thame reports.

What happens when you have two powerful forces pulling you in different directions? The logistics property business is about to find out.

To explain: a surge in the volume of online sales has inspired faster, quicker and (thanks to the speed) higher-volume supply chains. That’s the push.

Opposed to this, pulling the other way, are the slower, stuttering, complicated effects of Brexit-related customs checks and retailers with pandemic problems, such as disordered or unpredictable high street sales. Things that ought to move fast through the supply chain have sometimes moved slowly, or not moved at all. Some have gone back to warehouses. Containers are backing up at ports, and HGV’s are reported to be returning empty.

The result: one force pushing to speed up the supply chain, whilst the other is pulling it back. ‘Just-in-time’ logistics is morphing into ‘just-in-case’ as retailers and suppliers build a little slack into their systems. And the consequence of thousands of players adding a little slack is an enormous increase in the total amount of UK logistics floorspace needed.

This is the tricky dilemma facing the logistics property business at a time when demand for floorspace was already at unprecedented levels. How do they meet demand for yet more floorspace? Can the property industry deliver?

Andrew Dickman is director at specialist logistics developer Tritax Symmetry and of those now trying to work out what the latest push-pull really means.

“The obvious thing this means is some occupiers in some sectors need a lot more space,” Dickman says. “Just-in-time delivery in some sectors meant, for instance, keeping component stocks sufficient for 10 or 20 days of manufacturing. If we’re assuming slower or unreliable supply chains that roughly doubles. So the space required doubles.”

Quite simply, slower supply chains mean more inventory linger on more floorspace for longer.

He says: “We recently did a deal with a car seat manufacturer. They have a 20-minute time slot to deliver to the customer, it is that tight. If the HGVs arrive in the wrong order at their warehouse, then they go out of the warehouse in the wrong order, and it costs millions. And they’re telling us they need more kit on hand to prevent messing up, and the kit backs up, and that means more floorspace. “

In the North West, where Dickman operates, the demand for yet more floorspace couldn’t be more unfortunately timed. That is because in May 2020 the government announced that it was calling-in four North West logistics schemes clustered around the area where the north-south M6 motorway intersects east-west trans-Pennine routes.

The proposals, amounting to just short of 7 million sq ft of new logistics floorspace, include Langtree’s proposal for a 1 million sq ft logistics park on the 230-acre former Parkside colliery at Newton-le-Willows; Tritax Symmetry’s plan for 1.4 million sq ft at Symmetry Park, Wigan; and Harworth’s 1 million sq ft plan for Wingates, Bolton. A year later, a decision is still awaited on whether the schemes can go ahead. In the meantime most of the region’s big box shed supply is frozen.

Demand, however, has continued to march onwards. Data from Gerald Eve suggests North West logistics enquiries total as much as 14 million sq ft, with as much as 8.5 million sq ft focused on sites between junctions 20 and 26 of the M6 motorway.

Developers with smaller schemes, or in control of pre-existing planning consents, have been able to press on. But here too inflated demand is eating rapidly into supply.

Nick Wightman is director at developer Redsun who have now submitted a planning application for the 280,000 sq ft second phase of development an industrial scheme in Ellesmere Port.  Plans have been submitted for two distribution units measuring 200,000 sq ft and 80,000 sq ft. The news comes after Redsun speculatively developed a 125,000 sq ft industrial unit on the site, which was let to Survitec Group on a 20-year lease.

Nick Wightman says: “There’s a chronic shortage of good quality stock in the region. It’s a whirlwind.”

Wightman concedes there is something to the theory that the pandemic, and the just-in-case supply chains it has created, has fed demand for more warehouse floorspace.

“We completed our 125,000 sq ft unit in February last year, just as the lockdown began, which was either really awful timing or great timing. The chatter in the market was that there would be panicked requirements for firms worried about Brexit, but it didn’t turn out that way. But we did see a real surge in demand connected with the pandemic, Survitec supply personal protective equipment (PPE) and we landed the enquiry,” he says.

There are two ways in which changed patterns of demand are making themselves felt.

These are questions of plot density, and warehouse occupier’s property strategies.

Warehouse density has been on the move for years. Once, not long ago, a five acre plot would have generously accommodated an 80,000 sq ft warehouse. Relatively modest yard and parking requirements meant a larger plot was not required.

Not so today. In 2021, an 80,000 sq ft unit might need double the plot-size – as much as 10 acres – in order to cope with the higher frequency of drop offs and collections, and the higher volume of staff parking, electric vehicle charging points, and much else.

Wightman explains: “Occupiers want to future proof, which means they want larger plots so they can meet future operational needs. We’re seeing this strongly with the parcels operators, but it isn’t just them.”

“The consequence is not just that operators eat into the existing supply of land and buildings but because they are taking larger sites they are also eating into potential future supply quite dramatically.”

Jon Ryan-Gill is a Birmingham-based partner with surveyors Gerald Eve. He says the change in plot densities is rapidly eating into the supply of land.

“Many warehouse users, but particularly the parcels operators, have had to start thinking three dimensionally about the plots and warehouses. If they have vehicles waiting, vehicles picking up stock, it raises questions about how they do it. Some are thinking about putting multi-storey vehicle decks next to warehouses, which of course means they need bigger plots,” he says.

Plot densities which might have seen 45-50% of the plot built on now sink down as low as 35% in some cases: that means a lot of extra land.

Warehouse users don’t just want bigger plots, they also want to feel safe from the challenges posed by a fast-moving and fast-growing market. The property implication here is that any business that suspects they may need more floorspace next year than they do this year looks at a market with a rapidly shrinking pool of supply and decides: whatever is available, we’ll have.

Agents and developers are cautious about over-stating demand from occupiers but SHD has spoken to several players in a variety of UK regions and discovered the same pattern. Large, well-funded occupiers like Amazon are putting in bids on almost any suitable property, for fear of missing out if they need it in the near future. Whilst Amazon are mentioned most often, the consensus is that they are not alone. Everybody who can afford to play this expensive game is playing it.

The short-term effect is to restrict the supply of floorspace even further. The medium-term effect could be to create two classes of occupiers: those who can afford to sign property deals well ahead of their operational needs, and those who can’t. That it turn will affect the viability of the operators who can’t afford adventures in the property markets, leading to more consolidation and perhaps more business failures.

Are there any plus sides to the current complicated tangle of pressures? Well, maybe.

The collapse of dozens of high street retailers is likely to lead to the release of large volumes of warehouse floorspace. Debenhams could be a good case in point. Its 667,000 sq ft Sherburn operation in Yorkshire was already planned to close, but the 746,000 sq ft Peterborough depot was not. The Peterborough unit last changed hands for £84m in 2017 and with that amount of money wrapped up in the place, the owners will be anxious to find new occupiers.

Wightman says: “I expect we’ll get a churn of existing warehouse stock back onto market from Debenhams and other retailers. We could find there are some chunky sites there to meet occupiers needs.”

If you’re looking for a reason to be cautious about who gets those large churned sites, then it may be that the big grocers provide you with the perfect excuse. The supermarkets have had a torrid pandemic and have largely kept out of the warehouse property market.

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“Aldi, Lidl, Marks & Spencer have dipped toes in the market, but the entire supermarket sector has been relatively quiet. At least, so far. I suspect they are working out what they need in this changed market but decisions will be made soon. It might be about automation rather than floorspace, or low density sites, or more local hubs. But they will soon make decisions,” says Ryan-Gill.

The extra demand from supermarkets could add yet more fuel to the fire of a market already struggling to meet occupier needs.

The year is still young. So much could change. But there seems little doubt that the warehouse property market will not be getting easier any day soon.

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