Industrial and Logistics: The Race for Space
With the global pandemic creating an e-commerce boom, the industrial and logistics sector is looking at how it can address the surge in demand for space. Amazon’s recently announced plans to open more warehouses and delivery bases in the north and south of England is evidence that the pandemic has accelerated the transition from physical to online shopping.
Online purchasing activity has accelerated since the start of the COVID-19 pandemic, putting pressure on the UK’s existing warehousing and logistics facilities and resulting in high levels of take-up for existing facilities and space in the delivery pipeline.
New consumer demands and purchasing habits are here to stay. The pandemic has exposed the risks of long, interconnected supply chains and has acted as a driving force for increased near or on-shoring. The unrelenting growth of e-commerce combined with a realisation of supply chain weaknesses has bolstered demand to UK warehousing and logistics space. Brexit has also been good for the sector, encouraging many to make their supply chains shorter and to hold inventory closer to its end destination. No longer able to rely on frictionless trade with our closest neighbours, additional warehousing space will be necessary to mitigate supply risk.
Eroded by robust take-up, warehousing and logistics space in the UK is in increasingly short supply. A shortage of speculative new-build schemes poses a risk of creating a supply-demand imbalance as warehouses mangers feel increased pressure to take more space.
Industrial & Logistics in Numbers
According to the ONS, the private industrial sector achieved the highest new order growth rate in Q4 2020 of all the UK sectors. While new order growth tapered off for most sectors, private industrial new work actually grew by more than 24% in the final quarter of 2020.
The recovery in new work was also significantly sharper in Q3 (coinciding with the ending of the second national lockdown) for the private industrial sector. Although new orders across all sectors in construction recovered rapidly between Q2 and Q3 2020 it was the private industrial sector that led the recovery, growing by 108% quarter-on-quarter.
Looking at take-up of space in the industrial and logistics sector, 2020 saw the sector’s highest-ever recorded take-up. Around 46.8m sq ft of space was taken in 2020, which also saw the UK’s biggest-ever warehouse investment deal with Blackstone paying £473m for Prologis’ Platform portfolio in October.
Findings by Property Week, Savills and Tritax Symmetry in their fourth annual Industrial and Logistics Census reveal that:
- 41.1% of surveyed industrial and logistics sector occupiers anticipate requiring more space in 2021 and 2022
- 48.2% think they will need the same amount of space
- 10.7% believe they will need less space
In light of this, around 47% of agents believe that take-up will increase further in 2021 while 81% of developers, investors, land agents, advisers and agents believe that take-up will rise (27.1%) or remain similar (53.8%) in 2021.
The survey also indicated that the pandemic has had relatively little impact on the business performance of many companies in the industrial and logistics sector. However, it has affected the way they operate. Many have had to redesign existing facilities to accommodate for social distancing requirements and some are exploring ways to enable their staff to work from home.
Despite these operational changes, investment activity in the sector is generally not expected to fall anytime soon. Knight Frank estimates that for every £1bn of online sales, approximately 1.36m sq ft of warehouse space is required. With UK online sales forecast to rise by up to £67 billion over the next five years, we could see e-commerce drive additional requirements of 92m sq ft. However, this largely depends on the degree of automation used in the space.
Warehousing and logistics capacity was a real limiting factor in 2020 and many retailers were unable to capitalise on high online sales growth due to capacity constraints. Ocado, for example has decided to add c.40% more capacity over the course of the next 18 months, with new fulfilment centres planned in Bristol, Andover and Purfleet. Other retailers have similar ambitions. The question is, as they expand and enhance their distribution networks, what kind of space will be needed and where will it be located?
Availability of warehouse space
Historically, logistics and warehousing companies sought to occupy traditional locations that had been built with the intended use in mind. However, an increased emphasis on delivery speed in recent years has pushed players to establish and leverage an integrated network of both "big box" and smaller, metro focused local delivery stations.
With increased emphasis being placed on same-day delivery, more space is being taken in smaller but centrally-located urban facilities in areas of high demand. According to a 2020 survey, these last-mile, micro-fulfilment centres are the second most popular type of warehouse space (after highly automated warehouses). However, space shortages for this type of warehousing is driving some creative solutions. More on this below.
However, with many projecting a rise in new housing completions in rural areas over the next five years, rural/agricultural land may need to be released near major roads and highways for new industrial development. According to Savills, the volume of rural logistics space has the potential to come under significant pressure in light of the expected growth in demand for rural and semi-rural properties. Metapack, the delivery management software provider, suggests that currently 70% of parcels delivered in the UK go to just 7.5% of the country. However, this could change if growth forecasts for rural housing completions are realised. Warehousing and logistics managers would need to locate their facilities closer to rural buyers in order to eliminate the current two-tier delivery system currently seen in the UK whereby rural housing occupants are often excluded from next or same-day delivery.
When asset managers and investors were asked where in the UK industrial and logistics companies would like to invest, it was clear that space in the South East and London was the most sought after. The Midlands also featured strongly due to its high density of existing distribution facilities.
The East Midlands (which includes the ‘Golden Triangle’) has historically been considered prime real estate for the sector. Distribution centres here enjoy easy access to the major motorways, ports, railways and airports, enabling deliveries to reach over 90% of the UK population within four hours. With its central geographic position, couriers and manufacturers have invested heavily in the area over recent years, resulting in high take-up levels of new logistics facilities and increased competition.
However, this prime stretch of land is close to saturation point and development is now beginning to extend onto greenbelt land. As the availability of deliverable development sites has fallen, rental prices have increased, incentivising operators to look elsewhere in the UK to develop prime industrial warehousing clusters. The M62 corridor in the North, for example, has recently experienced rising levels of investment and more speculative developments and is primed for further growth in light of the Northern Powerhouse agenda and HS2. There has been a long-standing shortage of industrial space in this area despite strong levels of demand.
Areas surrounding the M40 corridor are becoming increasingly popular as it avoids many of the issues associated with the high demand in the Golden Triangle, namely congestion, accessibility to central London and high rents. Supported by high levels of investment in new housing developments (meaning that customers and labour resource is in close proximity), the M40 offers accessibility to 75% of the UK population within four hours.
Yes, the Golden Triangle will remain an important hotspot for UK logistics but other areas are seeing a great deal of investment due to the high demand and premium cost of the area. Amazon, for example, has placed multiple mid-sized warehouses further afield to accommodate changing demand patterns.
According to Savills, despite the fact that 10.8m sq ft of space was developed speculatively in 2020, total supply fell by 3.8m sq ft to 32m sq ft reflecting a vacancy rate of 5.7%. In fact, since Q2 2020, the supply of total space has fallen in every quarter, reversing an upward growth trend in supply pre-pandemic. Amid the strong levels of take-up in 2020, Grade A supply depleted rapidly. Savills indicates that supply of Grade A space in Q1 2021 stood at just 12.9m sq ft (41% of total supply) - the lowest level since 2017 and a fall from 55% of total supply just 12 months ago.
Around 8.19m sq ft of speculative development is due to reach practical completion in 2021. Given the current take-up levels, this will help broadly maintain supply and vacancy at their current levels. The number of requirements currently on the market (particularly for larger units of 500,000 sq ft +) indicates that occupier demand is unlikely to tail off significantly in 2021. Take-up is expected to remain above average in 2021 but sustaining the level of extraordinary take-up activity experienced in 2020 is unlikely.
Kevin Mofid, head of logistics research at Savills, believes that the big challenge at the moment is a shortage of supply. He said:
“Our data on the market identifies that vacancy rates are falling in all markets and it’s therefore no surprise that occupiers have highlighted the availability of warehousing as a major concern...”
More speculative development (of the right type and size band) is clearly needed across the UK but particularly in those areas identified by the 2020 Logistics Census Results.
Multi-Storey & Underground Warehouses
Among the largest deals in 2020 was Amazon’s pre-let of a 2.32m sq ft multi-level warehouse in Swindon in Q3 2020. With 600,000 sq ft on the ground level and three mezzanine floors (measuring more than 500,000 sq ft each), it will be the largest single warehouse sale in UK history.
The multi-storey warehouse concept, although well established in Asian cities, is less utilised in the UK. However, urban land premiums and the rapid growth in last mile delivery requirements has resulted in rising demand for multi-level, urban warehousing. The unrelenting growth in e-commerce sales has meant that it’s even more important for retailers to be close to their core markets and consumer bases, and with urban development land being so costly and scarce, developers are beginning to look to the skies.
In the UK, multi-storey warehousing makes most sense in densely populated areas where it is necessary to do more with less space. There is a real shortage of industrial and logistics space in many urban areas – something which multi-story warehousing could help alleviate. Planning policy is becoming increasingly supportive of the intensification of warehouse space but some simply view the multi-storey concept as too risky. There are very few examples in the UK to prove that the concept works and developers have a tendency to stick to what they’re most familiar with.
While more multi-storey schemes are being considered and proposed in the UK, so far, very few have been developed. The first operational example in the UK was SEGRO’s X2 building at Heathrow but the concept has taken a long time to gain traction. Typically, multi-storey warehouses are up to three storeys but the tallest can provide more than 20 floors of space. Direct lorry access (eg via wide ramps) is important and often preferred by tenants, otherwise you have to rely on goods lifts which may restrict the upper floors to purely storage use. However, some of these lifts can in fact lift the goods vehicles up to the higher levels which have dedicated docks and sufficient ceiling height clearances. This may not be possible on the top level but this presents developers with the option of adding mixed-usage to the development, accommodating office or retail space for example.
As Prologis stated in a REIT.com article regarding its experience abroad, “the company has already built 53 multi-storey distribution centres in Asia. One thing the Japan team stressed: There had to be two ramps.” Spiral ramps may be a practical solution in Japan which generally use smaller HGVs with lighter loads. However, the larger 44 tonne HGVs in the UK are simply not designed to go round spiral ramps. Wider, longer ramps that wrap around the building may be necessary, requiring higher-grade concrete and thicker rebar steel – both of which add cost to the project. Wrapping the ramps around the building space also means that you either need more land/larger footprint or loose net rentable area.
Another option for last mile delivery in urban areas is underground warehousing. Their advantages include:
- Thought to be environmentally friendly as it's easier to keep temperatures stable, lowering heating/cooling costs
- Cost of leasing underground facilities can be less per sq ft than above ground space
- Able to hold the levels of technology required of some the most advanced supply chains
Back in 2017, a proposal for an underground warehousing project near Heathrow airport was approved by councillors at Hounslow local authority. The subterranean warehouse (known as Rectory Farm) will provide up to 177,500m² of up to 9m high underground space. Above it, the disused land would be turned into the largest new park in West London for more than 100 years. The development is an innovative solution to the shortage of industrial space inside the M25. Additionally, beneath the topsoil lies £50-60m worth of high quality gravel (around 3m tonnes) – an essential material for the construction industry as an aggregate in concrete – which will help fund the project.
Engineers Arup plan to use a sealed “top-down” method of construction to liberate the subterranean material with minimal disruption. Dividing the site into segments of around 100m² to allow the park to be used while construction continues, they will first scrape back the topsoil before drilling great concrete columns into the ground, then cast a concrete slab on top and return the soil, landscaping the park with raised berms and pathways. The gravel can then be excavated over time and extracted via access ramps with a concrete batching plant on site for the project’s own construction.
While expensive to build top-down, savings will be made because the structure is made out of the very material they are digging on site. Excavation will take around 15 years but once done it will leave behind a vast warehousing space and income from the space will be used to pay for the upkeep of the 110-acre park (as agreed in the planning permission). The model works well in this particular location as it opens up a huge patch of green belt land to the public in an area where there is a severe deficit of open space. It also helps fulfil London’s demand for sustainably sourced aggregates, providing 70% of the mayor’s target over the next 25 years and reducing miles travelled to haul the gravel to London sites.
The ambitious project could potentially serve as a blueprint for other underground warehousing and logistics developments in high-value urban land areas. While very few countries have actually utilised underground logistics and warehousing space to date, like multi-storey assets, they represent a potential opportunity to establish last mile distribution hubs in space-constrained locations. However, with many businesses locked into long-term contracts and sitting on unused commercial property space throughout the UK and indeed globally, unlocking this space first is likely to be the preferred and more cost-effective approach.
Competition: Industrial Developers and End Users
Unfortunately, warehouse developers looking to slash delivery times are often in direct competition with residential developers for urban land. Local planning departments are under pressure to meet the insatiable demand for much-needed new housing and address the issue of chronic undersupply in the UK. Land (especially industrial land) is often favoured by policy makers for residential development as it comes with the added benefit of addressing historic land quality issues through remediation projects during redevelopment. However, the importance of Strategic Industrial Land (SIL) becomes clear when you consider that every one of these new homes will require the services provided by industrial businesses such as last mile logistics.
The supply of industrial land has been diminishing in urban areas as land gets bought up for high-value land uses such as residential redevelopment. Between 2009 and 2019, London lost around 100 hectares of industrial land annually despite demand for industrial and logistics space skyrocketing over this period. The huge demand for the facilities from retailers is being met by an increasingly diminishing number of buildings. While cities like London are under pressure to supply both housing and urban logistics, warehousing and logistics developers are often unable to compete with residential developers when commercial sites do come to market.
One solution to this problem is to create multi-use sites. However, while it may be possible to co-locate urban warehousing and residential space either next door to, or even on top of each other, this has raised concerns that site deliveries may disturb residents or cause congestion in the area. The ‘sheds and beds’ model, something we touched on in a previous report, does tick a lot of boxes but it also presents several hurdles. Hybrid concepts will require logistics operators to come up with innovations that will minimise disturbance to their residential neighbours. Cleaner, quieter technology will be needed to entice tenants to live on semi-industrial land. Separate entrances and well thought out traffic flows will be required as standard but ultimately it will be market forces that dictate the future success of this model and its adoption in urban locations.
Another solution that has arguably been accelerated by the pandemic is the conversion (or part-conversion) of bricks-and-mortar retail space into urban logistics hubs and micro-fulfilment centres (MFCs). Many retailers will choose to reduce their physical retail space in the post-pandemic world and this is driving a change in the economics as retail and logistics rents begin to converge. Yes, urban rents are likely to be higher than out-of-town warehousing rents but operators will likely justify this to increase speed of delivery and grow their urban market share.
Build Cost & Programme
Build costs and programme delivery timescales are expected to rise in 2021. UK warehouse and logistics construction rebounded sharply after the first lockdown and contractors have become busier and more selective in what they are tendering as a result. The high levels of demand also mean that contractors are able to pass on recent material cost rises (eg steel) to the client/end consumer.
In addition to the current lack of construction capacity in the UK warehousing and logistics sector, a number of other factors are likely to conspire in 2021 - namely structural challenges related to process change that have been accelerated by COVID-19, the availability of labour and Brexit encouraging increased near or on-shoring. These factors will act to increase build costs, but they will also add time to current programme durations. In turn, this has the potential to impact the speed at which speculative units can be delivered into an already supply starved market.
James Clark, Senior Associate at Gardiner & Theobald, said that in addition to cost increases, clients and contractors are facing additional challenges in the sector with long lead-in periods of up to 25 weeks for steel and wall/roof cladding systems in the first quarter of 2021. He added:
“In the current market, G&T is benchmarking an additional 3-7% for a 150,000 sq ft speculative new-build development over and above the same building in Q1 2020. This is predominantly due to market demand and increased material prices.”
In terms of the broader picture, yields for warehousing and logistics have dropped as a result of a greater number of investors seeking a share of the market. Consequently, land values have increased significantly (eg in the East Midlands values have increased from approx. £600k per acre to around £1.2m over the last couple of years for logistics) and construction costs in relation to the infrastructure (which form the lion’s share of the build cost on any major scheme) are also increasing. However, despite the fall in yields, both land values and construction costs are being supported by increased capital values.
G&T recently provided Cost Management and Project Management (pre-contract) services on a 370-acre development located opposite Nissan’s car production plant near Sunderland.
The International Advanced Manufacturing Park (IAMP) was split into two phases. The first phase, which covered the infrastructure works on approximately 125 acres on predominantly greenfield land, enabled the development of the plots and facilitated the construction of around 1,650,000 sq ft of modern manufacturing space.
A new 1km long access road was constructed with all associated utilities and drainage, and three plots (totalling 623,000 sq ft) in phase 1 have been delivered to date. Once the available space on ‘IAMP One’ is close to being fully let, the team will embark on the ‘IAMP Two’ infrastructure works to release the balance of developable area.
In early 2019 a new joint venture company was set up between the North East universities and Nissan to undertake research and development into new car technologies and electric vehicles. After planning approval was achieved the JV Company was able to construct a 138,840 sq ft (GIA) building known as The Innovation Centre on the IAMP site in under nine months with work starting on site in summer 2019 and completing in spring 2020. A few weeks away from practical completion the NHS elected to take over the building with immediate effect for use as an emergency Nightingale hospital to support the national response against the COVID-19 pandemic. More recently, the building has become a vaccination centre.
The unit includes two floors of office space which, when combined with the warehouse space, provides a ‘lettable’ area of 124,916 sq ft. However, on top of the office at second floor level is a plant room which takes the total area to 138,840 sq ft (GIA).
Costing approximately £13.5m (or £95/ sq ft) the building was more expensive than usual but this was because c. 20% of the building was office space and the project included full fit-out of both the office and warehouse space and also the installation of two 15t cranes. G&T provided Project Management and Employers Agent services from that first occupier enquiry through to successful completion and handover to the NHS.
Developing logistics and warehousing capacity, particularly in urban areas, remains a challenge. There are both economic (eg land values) and political (eg availability of land for industrial development) hurdles.
Fortunately, the New London Plan offers overall support to increase or retain industrial floorspace capacity. It should enable a better accommodation of logistics and industrial activity within London, where competition for floorspace usage has been fierce and will continue to be in the future. Other cities in the UK will need to follow suit and try to abate the loss of land for urban warehousing and logistics solutions. Failing to do this creates a fundamental risk that new demands arising from urban population centres will not efficiently and effectively be met.
Urban logistics supports the efficient functioning of a wide range of sectors, not just retail. Failing to earmark sufficient space for urban logistics will have a direct impact on sectors with time-critical requirements. Hospitality, construction, manufacturing and even the banking & finance sector rely heavily on speed of access and so relocating industrial land outside city centres is not a practical solution, especially when you factor in the additional carbon emissions and the lack of local job creation. Arguably, poor urban logistics networks will make UK cities less competitive places to do business and reduce their residential amenity.
COVID-19 and Brexit have undoubtedly accelerated a number of trends in the warehousing and logistics sector. Warehousing space has seen a surge in demand in tandem with the meteoric rise in e-commerce sales while Brexit has prompted many businesses to increase space so that they can hold more inventory for longer and maintain lead times. The pressure on companies to increase inventory to handle short and medium-term disruptions caused by COVID-19 and Brexit is leading many to reconsider their warehousing strategies.
The ‘beds and sheds’ hybrid model, the multi-storey concept, converting retail space into urban logistics hubs and indeed underground warehousing and logistics facilities are some of the potentially viable options being considered to help unlock space and update outdated UK supply chains. Even after the pandemic, demand for warehouse space is expected to remain high as customers now used to ordering online continue to do so. Warehouse capacity has been pushed to the limit but demand for space is expected to remain high.
G&T has an intricate knowledge of the warehousing and logistics sector, ascertained from years of first-hand project experience. We have been able to successfully advise clients on the latest trends, enabling them to deliver modern, flexible and efficient space suited to the changing requirements of end-users. The pandemic has put a greater focus on speed of delivery, creating a need for more bespoke solutions that can be developed across a wider range and type of locations. From inner city build-to-suit multi-storey warehouses and smaller, last-mile logistics centres to traditional, Grade A ‘big box’ units in hotspots such as the Midlands, G&T can provide a range of services that can help you navigate this evolving sector. To find out more, please contact us to discuss your project requirements.
 The 25 week lead-in period is for CA cladding and Euroclad twin skin systems and also more generally for products from Tata Steel. The lead-in time for composite products is not as long