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The race for warehouse floorspace this winter

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Are retailers and 3PLs “stockpiling” warehouse floorspace this winter? Are warehouse occupiers panic-buying logistics property as the supply chain crisis spirals? David Thame says yes – and no.

Everyone has heard the stories, and they go like this. Retailers and third-party logistics businesses are worried. They know that the on-going UK supply chain crisis means they need to keep more inventory. They know Christmas is coming and they know that the labour shortages and supply glitches of the last six months will not suddenly disappear next year.

The result: add some extra warehouse floorspace. This might mean signing up for new warehouses, or adding some space to an existing NDC or RDC, or it might mean re-thinking an existing live requirement. You could call it “Brexit buffering”, and some do.

Depending which version of these stories you’ve heard, the extra floorspace amounts to 10-20% increase on what occupiers might otherwise have had. Or it might be something much more extensive, perhaps doubling a 200,000 sq ft requirement.

But there are two schools of thought about these stories. One says Brexit buffering is real, and is happening. Logistics occupiers are stock-pilling floorspace, in the same way some people stockpile toilet paper.

The other school of thought says it is much more complicated, and might not be happening at all.

So let’s begin with some numbers, and the analysis offered by one the UK’s top property consultancies.

Last week Gerald Eve published its Q3 Prime Logistics Bulletin, showing occupier take-up at a record high, availability of logistics space at a record low leading to widespread rental growth, and more speculative space starting development than in any quarter on record.

Their data showed that the volume of second-hand space on the market fell for the fourth consecutive quarter, the supply of up-and-built new stock is also extremely low, especially in London and the South East and the Midlands.

The gloss the firm put on the figures was interesting. “The recent HGV driver and petrol shortage has highlighted how vulnerable some supply chains are to spikes in demand,” Steve Sharman, Partner and Head of Research at Gerald Eve, said.

“Many occupiers are now making plans beyond the immediate operational challenges to make supply chains more resilient and agile. These include pivoting away from just-in-time management to more regional or domestic supply chains and increasing the adoption of technology and sustainability in warehouses, all of which will have a knock-on impact on real estate decision making.”

Other close observers have witnessed similar changes. Jonathan Priestly is senior director at surveyors CBRE and a member of the industrial and logistics team.

“There is evidence, yes. Some of the deals we’ve done have been with Brexit buffering in mind, as clients increase their stock levels. It’s not uniform – it is not in all sectors – but in manufacturing, raw materials, and retail, where recent supply chain problems have compounded the issues, and where shipping is also a problem, yes we’ve seen occupiers take more space to meet these needs,” Priestly says.

Space-stockpiling can range from 50,000 sq ft extra to as much as 200-300,000 sq ft extra, sometimes in the form of larger warehouses, and sometimes in the form of taller warehouses that allow occupiers to insert mezzanine floors to add extra capacity.

Unlike the recent petrol and diesel supply problems – which afflicted the south and east more than the north and west – Priestley does not see much regional variation in the pattern of Brexit buffering.

The one except would be Greater London where the supply of logistics floor space is acutely tight. He suspects that it is the tight market, rather than any more complicated economic factors, that are disturbing occupier patterns in the capital.

“I think the issues here are about electric vehicle ranges, and urban logistics,” he says. Priestley points to Bericote/Triatax’s letting of 450,000 sq ft at Dartford, believed to have secured Ikea as an occupier, as proof that larger sites beyond the M25 are now heavily in favour.

dreamstime_m_16413356.jpgTalk to experts at Colliers and you hear the same confidence that warehouse occupiers are inflating their property requirements to meet current needs. But you also get a sharper focus on the multiple complex dynamics driving the apparent change of mood in autumn/winter 2021.

Andrea Ferranti who heads Colliers’ Industrial research and Simon Norton in a Midlands-based director in the firm’s industrial team.  Both agree a certain amount of floorspace stockpiling is going on – but they aren’t so sure about the volumes involved.

“It’s so difficult to separate out the threads. It is difficult to say what is a response to supply chain issues, what is a response to consumer behaviour, or what is simply seasonal, because any sensible retailer or 3PL would be mad not to hold a little extra inventory as we enter the peak season,” Ferranti says. “At the same time the supply of warehousing across the UK is so tight that any warehouse user who gets the change to acquire more floorspace will probably do it, even if they don’t need it straight away. They will think of it as futureproofing.”

Norton points to anecdotal evidence that some occupiers in some areas are responding to immediate problems by grabbing extra floorspace.

“The issue seems to be for retailers or 3PLs when it comes to handling in-bound goods. I know of one 3PL who found it very costly to have early arrivals of next season’s fashion in containers at the port. So they are looking at taking warehouses further in land because that is cheaper,” he says.

The same applies to imported white goods, also arriving early to beat potential supply chain glitches.

Those retailers and 3PLs who chose to take a little extra winter 2021 floorspace are tending to pick from a narrow range of locations, Ferranti explains.

“If you have increased inventory to store, then you won’t store it in London because it is so expensive. You will pick a good secondary location, perhaps nearer the ports on the east coast, or a primary location which is cheaper than London and the South East – which basically means the Midlands,” he says.

Asked if the current autumn surge in requirements was seasonal stocking-up, Brexit or the supply chain crisis, both Norton and Ferranti say the answer is “all of them.”

“And on top of all three, there’s another issue,” says Ferranti. “That is that some warehouse occupiers are trying to get their hands on as much floorspace as possible because they expect their business to grow. They believe that if they don’t manage that problem now – if they don’t act fast – they will soon run out of floorspace and so can’t grow their business.”

Behind that sits yet another problem, which is that e-commerce is under constant pressure to add new stock lines. There are plenty of (anecdotal) examples of retailers who maintain 8,000-9,000 lines for their bricks and mortar stores, but offer far wider ranges (16,000 plus) online. All that stuff has to go somewhere.

“Online retailer typically requires 3.5 times more warehouse space than servicing a shop, because of returns and so on. Add in the extra stock lines and obviously people will need a lot more space now and in the future,” Ferranti says.

Norton speculates that the inevitable outcome is not just a blip in seasonal take-up this winter, and continued growth in warehouse requirements next year, but the birth of a new range of monster mega-warehouses as efficiency drives scale.

“We’re already seeing much bigger facilities – 500,000 sq ft, 750,000 sq ft, with mezzanine floors, it can add up to millions of square feet. Automation might slow down this growth because faster handling means you need less floorspace, but on the other hand demand for e-commerce could push it up. The size of warehouses will keep growing – maybe in three years’ time they will be millions of sq ft each – until at some point those pressures equalise, and the size requirement stabilises,” Norton says.

But not everyone is convinced that autumn/winter 2021 is unusual, or that warehouse occupiers are stockpiling floorspace. Bruno Berretta is associate director for research at Cushman & Wakefield. He reckons the evidence for stockpiling is thin.

“On the deals we track, I’ve not seen an activity obviously driven by the need to ramp up stock levels because of problems in the supply chain,” Berretta says. “If it is happening, IU guess those who need to mitigate supply chain problems by taking extra floorspace will be looking at short-term deals, or activity on a small scale, neither of which are we monitoring. So there may be a spike in enquiries for flexible floorspace – but we’re not seeing it,” he says.

Barrett says that, given a choice between Brexit, supply chain problems, seasonal re-stocking or occupiers simply grabbing extra floorspace in a tight market, he picks the last option. “The shortage of floorspace in the UK property market is the real issue. Looking at the figures any occupier who suspects they need more floorspace will act sooner or later to get that floorspace – we would encourage them to do that – because the supply problem is going to get worse before it gets better,” he says.

“Yes, there’s a combination of things going on. Brexit, directly or indirectly, is an issue, so are seasonal issues and employment issues. But if you look at the data there’s evidence that retailers have rather lower stock levels than usual, not higher, and if its lower why would they need more floorspace? They are rushing to replenish stock levels, yes, but they are struggling,” he says.

Whilst Berretta politely denies he’s pouring a bucket of cold water on the idea of seasonal floorspace stockpiling, it nonetheless sounds like that’s exactly what he’s doing.

“I’m not saying it is not happening, but I am saying its not feeding through into our market. I think most of the big retailers and 3PLs have the capacity to cope already,” he says diplomatically.

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