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Get smart on warehouse supply

04 February 2022

In a way it’s great to seeing a booming warehouse sector, with huge demand and innovation driving transformation. It’s taking the sector well and truly into the 21st century, but it brings all sorts of practical challenges with it, says Simon Duddy.

A new report from the British Property Federation and Savills in partnership with the UK Warehousing Association presents the range of issues facing warehousing very effectively. The Levelling Up – The Logic of Logistics Report highlights a warehouse supply bottleneck, which could undermine economic growth in the UK. It argues the supply-demand dynamics of warehouse space have been distorted since 2011, with annual take-up averaging 34 million sq ft (net) over that period, 46% higher than the net delivery of new space. This chronic shortage of warehouse space has seen rents rise 61% – more than twice the rate of inflation – and the national vacancy rate stay consistently below the ‘equilibrium’ rate of 8% which the report demonstrates is the level at when demand and supply are broadly in balance.

The report also examines how national planning policy and increased housing targets have restricted the development of space for the logistics sector. It says demand for industrial and logistics space across England has been underestimated in planning policy for a decade, and future demand is likely to be at least 29% higher than past levels. 

British Property Federation chief executive Melanie Leech, says: “For over a decade planning policy has underestimated the need for logistics space in and around major population centres to support the growth of eCommerce and create robust and resilient supply chains. Demand for warehouse space is currently at an unprecedented level, but future demand is likely to be significantly higher as the digital economy continues to expand, and supply chains are reconfigured post-Brexit. It is therefore imperative that we find new ways to complement the delivery of housing with modern warehouse facilities, which will support jobs and growth and help revitalise regional economies.”

Tackling space shortages will require action on planning.

The BPF has called for greater support for industrial and logistics space as critical national infrastructure within national planning guidance. Its recommendations in its Employment Land Manifesto, published in 2021 included:

  • Binding targets for delivery of employment space, including logistics space, alongside housing targets.
  • Introduce a presumption in favour of logistics space where sites meet certain criteria around transport connectivity and appropriate for the development of large buildings.
  • Modernise Employment Land Reviews so that real time information on trends such as eCommerce growth inform allocation of land for logistics.
  • Ensure logistics are planned for separately to other industrial uses in Local Plans.
  • Adaptation of Design Codes to be appropriate for logistics developments.

SUPPLY CHALLENGES

It’s not just about planning, there are huge challenges ahead to break the deadlock, with a number of factors complicating efforts, notably labour and supply chain challenges.

Savills’ Will Cooper says: “While the market data is clear that more speculative development is needed to satisfy anticipated levels of demand, developers remain at the mercy of issues in global supply chains that are impacting the availability of key materials for warehouse construction.

“For over a decade planning policy has underestimated the need for logistics space in and around major population centres to support the growth of eCommerce and create robust and resilient supply chains.”

“Indeed, the latest indicators from the Savills ProgrammE and Cost Sentiment Survey (SPECS) demonstrate that build costs and programme delivery time scales are continuing to rise. While good project management and early orders can mitigate some of the issues the overall impact remains that projects are taking longer to deliver than before.

“In 2022 we expect that labour availability will become a larger issue as successive lockdowns and the impact of Brexit mean that there are fewer contractors in the market able to work in a market that has dramatically increased in size. Moreover, from April the use of Red Diesel in construction will be banned. While this move is aimed at pivoting heavy machinery to use less fossil fuels the short term will be that fuel costs increase by 47p per litre which has the knock-on impact of making earthworks considerably more expensive.”

UPWARD PRESSURE ON RENTS

Speaking about JLL’s own research, outlined in its latest Big Box Logistics Report, JLL director of industrial & logistics research Jon Sleeman, concurs: “Material shortages, labour supply issues and global transport bottlenecks began to effect new construction projects particularly over the second half of last year.

“The average cost of construction materials increased by 23% in the year to November 2021, while the cost of prefabricated structural steel surged by 66%. Specifically, in the big box logistics sector we think build costs rose in the region of 20% to 30% over 2021.

“In 2022 we expect that labour availability will become a larger issue as successive lockdowns and the impact of Brexit mean that there are fewer contractors in the market able to work in a market that has dramatically increased in size.”

“The logistics market cannot buck these trends which will make new logistics supply more challenging and more expensive. We think new speculative supply will continue to lag demand and rising costs will add to the demand and supply imbalance to generate additional upward pressure on rents. 

“As a result, 2022 looks set to be another challenging year for occupiers in need of additional logistics capacity, especially for those who cannot afford to wait - and the impetus behind rental growth will continue.”

CAPITAL

The growth plus scarcity formula has led to record investment in the industrial property market, with an influx of cash from foreign investment firms particularly notable. 

Tom Scott, director in Savills industrial investment team, says: “Overseas investors accounted for 55% of the total market, the highest proportion ever recorded and up from just 20% in 2018. This has largely been at the expense of UK institutions who, in 2018, accounted for 32% of the market falling to just 16% of the market in 2021.”

Transactions have included the £1.7 billion sale and lease back of Asda’s warehouse portfolio to Blackstone.

Joel Duncan, director of capital markets, JLL, adds: “We estimate that the amount invested in the industrial and logistics sector over the whole of 2021 was in the region of £16 billion, well above the previous highest annual level registered in 2017 (£11 billion) and nearly double that posted in 2020 (£8.3 billion). There is still a huge weight of capital chasing a finite stock and we don’t expect this to ease going into 2022.”

This scarcity and demand (driven largely by eComm, Brexit and Covid) is pushing up investment, and with it the cost of properties, which makes rental yields lower, which investors will try to rebalance by raising rents for tenants.

WHAT TO DO

Occupiers should plan early and be organised if they want to move premises or build new, and should perhaps expect delays and rising costs. The temptation to make do with premises in place must be great, and that is where it pays to investigate reconfiguring the warehouse, mezzanines, investments in temporary buildings and virtual warehouse solutions (e.g. Bis Henderson Space) that allows you to use spare space in the warehouses of other companies.

Key stats

  • Estimated future warehouse need in England - 44m sq ft (net) pa. (Savills)
  • 70.1 million sq ft was let during 2021 - more than double the pre-pandemic average. (Cushman & Wakefield)
  • Q4 supply figures - 3.3% vacancy rate for units sized 100,000 sq ft and above, or c. seven months’ worth of supply. (Colliers)
  • 41% of total take-up in 2021 was directly linked to online fulfilment. (JLL)
  • Amazon accounted for 28.3% of total take-up, up from 25% in 2020. (Colliers)
  • Overseas investors accounted for 55% of [investment in UK industrial property], the highest proportion ever recorded and up from just 20% in 2018. (Savills)

 
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