Probably the last thing you want to be told about 2022 is that it is going to be interesting. True?
After two years that had more than an enough “interest” in them, a quiet period of steady routine achievement would be welcomed by most people in the supply chain and logistics property.
Alas, there’s some bad news for you. On the other hand, there’s some good news too.
The good news is that most of the appealing upsides of 2021 will roll through into 2022. This means that online demand is unlikely to drop, may accelerate, and in any case will mean more work for supply chains and logistics property because e-commerce inventories appear to be growing.
Knight Frank calculates that e-commerce sales 3% above expectations by 2025 will generate another £37B worth of online sales. This in turn will drive demand for a further 12M SF of last-mile urban logistics space by 2025, and keep a lot of 3PLs and retailers very busy indeed.
The revised projection follows increasingly confident forecasts that e-commerce sales will amount to 30% of all retail by 2025, rather than the 27% thought earlier this year.
You can also expect rents to go up, speculative development to largely fail to keep pace with demand, and labour/electricity connection issues to remain top of many warehouse occupiers’ list of reasons for sleepless nights.
But there will also be some changes to look out for in the new year.
SHD has spoken to the men and women who know, and these are the hot projections for 2022.
Prediction 1: hub and spoke is back
Hub and spoke was big news two decades ago – then the market performed one of its periodic U-turns and it distribution was all about Golden Triangle mega-sheds. Now we’ve come full circle and its hub-and-spoke all over again, only this time we call the spokes “urban logistics hubs”.
Knight Frank’s analysis of the hub-and-spoke networks servicing online retail found that 23.5% of space is allocated to 'spoke' facilities that are servicing last-mile deliveries, and demand for these facilities is expected to grow as online shoppers demand faster delivery times, requiring logistics operators to hold stock closer to consumers.
The inevitable outcome will be yet more demand for warehousing. Funding will be needed for another 12 million sq ft of last-mile logistics space on top of existing demand, thanks to e-commerce growth way ahead of expectations.
Prediction 2: resilience is a thing
The supply chain crisis of the last six months has forced re-thinks at almost every level.
The old just-in-time approach to light inventory now feels less like lean business sense, and a lot more like a disaster waiting to happen. The unsurprising take-away for supply chain resilience means it makes sense for retailers (and everybody else) to hold much larger levels of inventory.
Inevitably the new focus on supply chain resilience is also helping to stimulate demand. “The Suez Canal incident in March and the more recent HGV driver shortages have further underscored the importance of supply chain resilience and suppliers are looking to increase their stock holdings, and develop shorter, more dependable supply chains to ensure their operations can withstand any further shocks,” says Knight Frank Head of Logistics Charles Binks.
Prediction 3. Its all about cold stores
The international investors who have been putting up the cash for new warehouse development are, naturally, cautious folk. One of their main concerns is to spread risk – and one way to do that is to invest in different kinds of warehousing, rather than just stick with standard big boxes in the Midlands. Their worry is that big boxes may be overpriced – which in the language of property investment translates into a desire for property with a higher yield (the ratio of price to the income generated by rent).
Knowing that grocers and supermarkets had a good pandemic, and that rapid grocery delivery (Getir, Gorillas) is increasingly big news in the cities, they are now turning to cold stores. This is where they expect demand because the yields here are a lot more appealing (e.g. higher) than the 3-4% now being recorded for super-prime ambient warehouses.
Savills IM’s Thinking Outside Big Boxes report concluded that 8% annual growth in the European cold storage sector could see it grow to $113 billion by 2025, a massive uplift from $75 billion in 2019.
Lambert Smith Hampton say there are around 650 cold-store facilities in the UK adding up to about 120 million sq ft. Take-up doubled to 7.2 million sq ft in 2020, more than half of it new build.
Prediction 4. Inflation is back
It’s so long since inflation was an economic issue that many will struggle to grasp which it means both for the supply chain and for warehouse property.
The answer is: it could mean all the difference in the world.
First, the facts. UK consumer price inflation (CPI) rose by 3.8% in the 12 months to October 2021, up from 2.9% in the 12 months to September. This is partly explained by a significant rise in transport costs – and we’ll come back to that thought in a moment.
Inflation at that level is not wildly troubling – although anyone who understands compound interest will realise it could soon become troubling, if it persists. The direct effect on warehousing is that investors decide cash is an even worse place to keep their money, and that other assets are a better bet.
Unfortunately it also means that property – a traditional hedge against inflation – sees an influx of money, pushing down returns (yields). The yields go down at exactly the time inflation goes up, making property a fairly source of immediate returns (even if its long-term potential remains good). This pressure on yields causes investors to re-think.
If the gap between yields and inflation gets too big, then serious rethinks are in order. Today Savills IM says prime net initial yields are currently at historically low levels of 3.5% to 4%. Inflation is in the same ballpark.
The other effect of inflation is to make tenants a shade more reluctant to pay the high and rising rents that investors demand. As mentioned, rising transport costs contributed a large chunk of inflation growth and nobody feels rising transport costs like operators in the supply chain. If input costs (fuel) are rising, but it gets harder to pass that on to customers, supply chain businesses have a headache. They will have to squeeze costs elsewhere.
At this point property industry folk usually say something like this: property costs like rent are a few small proportion of supply chain costs, barely more than 5-6%, and so the scope for squeezing them is low. Therefore, rents won’t get squeezed by operators’ cost-pressures.
The standard response is to point out that it is the proverbial straw that breaks the camel’s back, and that even a relatively modest rent could turn out to be too much to handle, if your business is under pressure. If you doubt this, look at the sad fate of many high street retailers.
To add to the joy, take a glance at Turkey where inflation is already galloping past 20% (on some measures). Nobody expects hyper-inflation to set-in here in the UK, but the Turkish example shows how seriously destabilising inflation can be. It is a lesson well worth learning.
Prediction 5. The money tap is still turned on
Despite the inflation risk, international money is still clamouring for a chance to buy warehouses and last-mile logistics hubs.
Half year figures – the latest available – show that investors spent €22.5 billion buying European sheds January to June, up 60% on the same period in 2021. The UK was the most popular location, say Savills, claiming 37% of all spending. Nearly three quarters of institutional investors expect real estate allocations to increase in 2022.
Data from a massive global survey organised by Cornell University together with London and New York real estate consultancy Hodes Weill & Associates revealed as much as $80 billion to $120 billion of extra money coming into property in 2022. A vast chunk of this is heading to warehouses as the popular “beds and sheds” strategy – which means investing in residential property and warehousing – gains more traction.
Prediction 6. Climate change?
In the wake of the COP26 climate summit, environmental issues have scarcely had a higher profile. However, the evidence that it matters much to the people who pay for warehouses is equivocal.
City broker HYCM together with City AM, the London business paper, conducted research to find out who cares, and how much.
Just under 45% of the investors they polled said it was both important and a priority for their investment plans. Just one-fifth thought investing in special Environmental, Social and Governance (ESG) projects was a bright financial move. Less than a third thought COP26 would speed up plans to invest in sustainable assets.
This cool response contrasts with data from Savills IM, who reckon 82% of the investors they surveyed believe that climate change will impact their investment strategy
The vast majority of surveyed investors (79%) also expect there to be a demonstrable increase in the demand for green-labelled properties over the coming 12 months, with 26% expecting a significant rise.
So it is still too early to say what impacts the sustainability agenda could have on warehousing in 2022. But wise heads should expect action.
Prediction 7. Expect the unexpected
We live in strange times. There are plenty of other things that could go right – or badly wrong – in the next twelve months. The major geo-political and macroeconomic opportunities and risks in 2022 include from major elections across Europe, the tensions between the US and China, to global supply chain disruption and the return of Covid-19 restrictions.
Whatever happens, keep smiling.