It’s a brave new world but can the property industry keep up? Liza Helps investigates.
It’s been called an emergent asset class: investors worldwide are being promised rental returns 40 – 50 per cent higher than for traditional warehousing, but e-fulfilment centres are anything but straightforward.
Driven by the rise in e-commerce, the very nature of our built environment is changing but the property industry is lagging far behind. Many institutions which invest in warehousing and thus enable the logistics industry to grow by providing the capital to build, are still banging on about a standard institutional building of 100,000 sq ft with 12m eaves, eight dock level doors with a site density of 45 per cent – it’s as old hat as wearing a bowler in the City.
Jonathan Holland of Legal & General Property says: “E-commerce, in general, is rapidly maturing but property solutions remain ten years behind.”
Richard Sullivan of Savills agrees “Modern logistics is becoming increasingly sophisticated and it’s obvious that one size doesn’t fit all.”
However, with reactionary and out of touch investors, the ability for the property industry to meet the needs of an increasingly sophisticated supply chain is seemingly impossible. Already there is a massive shortage of Grade A stock nationwide and this can only be holding back the e-commerce revolution and thus the growth of the UK economy. According to the latest CBRE research in terms of big box logistics (units over 100,000 square foot), at the end of the first quarter of this year, only 6.5 million sq ft was available across the UK, a decrease of 30 per cent year on year.
Andrew Marston, director of industrial and logistics research at CBRE says: “This space is very poorly distributed throughout the country. Core markets such as the South East, Midlands and North West have nearly no new large units.”
Charles Crossland of developer Goodman adds: “The supply of large sheds in strategic UK locations is running very low, and this lack of availability is constraining e-commerce users.”
This situation is likely to get worse, says Sullivan. Savills commissioned a report on e-tailing and the impact on distribution warehouses and noted retailers could take up to 50 million sq ft of warehouse space over the next five years, of which 13 million sq ft, (26 per cent), will be driven by online sales and the consequent expanding UK e-tailing operations. The total predicted take-up represents a 21 per cent increase on the previous five years, which had a total take up of 41.3 million sq ft.
The research was conducted by Transport Intelligence in association with Savills and targeted the two key players in the e-tailing market: traditional retailers, such as supermarkets and department stores; and logistics providers including express parcel companies and e-fulfilment companies for instance, Amazon, Norbert Dentressangle and iForce. Of all the retailers and logistics providers surveyed, almost a quarter anticipated e-tailing to increase by a further 25 per cent during the next 12 months.
At present the UK is the global leader in e-commerce with between 10 – 12 per cent of retail sales now occurring on-line, the annual equivalent of 60 million sq ft of retail space rising to 20 – 25 per cent by the end of the decade according to Legal & General Property’s research team.
Holland believes that one of the reasons for the slow response of the real estate sector is the industry’s failure to take an integrated approach to retail and logistics instead predominantly treating them as separate disciplines, unlike successful retailers.
“High street loss will be industrial gain,” he says, “e-commerce leads to more demand for warehousing.”
Indeed, Prologis research suggested that every additional £800 million of online sales resulted in an average additional warehouse demand of about 775,000 sq ft in the UK over the last five years.
With some 364 million sq ft of available warehouse space in the UK, according to the latest research by Lambert Smith Hampton, surely there is enough to satisfy demand, even from the e-commerce sector?
But Holland says: “Many properties are not fit for purpose or it is just in the wrong location.”
Warehousing requirements have moved on and there are new formats requiring very different solutions. Firstly there is the “dark store” used by grocery operators which need to be close to population centres. These power-hungry warehouses typically range from 75,000 sq ft to 125,000 sq ft says Steven Mitchell of Colliers International. “These need around 800KvA, double that of a normal warehouse with a low site density and lots of car parking.”
Then there are the massive regional e-fulfilment centres frequently used by multi-channel retailers such as Marks & Spencer, which has just opened its e-commerce centre at Castle Donington.
And finally to get that last mile there will also be a need for more urban distribution centres as goods are sorted and sent to homes or collection destinations.
Andrew Gulliford of SEGRO notes: “It is relatively early days with no absolute standard pattern as to how the supply chain will evolve with regard to e-tailing. Some are looking at multi-channel, others dedicated large online facilities like Amazon – though the company is also thinking about smaller satellite depots; some are doing the whole thing themselves from large dedicated RDCs through to local services while yet others, for example Next, is using Hermes, a 3PL, to do their last mile. Quite a lot of thinking is going on as to what will be the best home delivery option and then you have to factor in the advent and growth of ‘Click and Collect’.”
At present 36 per cent of logistics providers currently operate from dedicated e-fulfilment centres, which solely meet online orders and this is likely to grow according to Transport Intelligence and Savills’ research.
The report notes that over 50 per cent of retailers expect an emergence of centralised UK e-fulfilment centres to cater for increased online sales. Meanwhile, almost 40 per cent of logistics providers would opt for a single centralised facility that could provide distribution for both physical stores and internet sales. These centralised depots would be further enhanced by a network of smaller, local e-fulfilment warehouses that can meet tight deadlines.
Sullivan comments: “The continuation of a centralised distribution model by retailers and logistics providers, whether solely for e-tailing or multi-channel use, reinforces the need to maintain a supply of big sheds. With limited Grade A stock, the next five years will present encouraging possibilities for strategic land holdings.
“Of the total number of all survey respondents, 43 per cent favoured the East Midlands, compared to Greater London, which was the first choice for 17 per cent. Meanwhile, an increase in requirements for local e-fulfilment depots on edge of town locations could spark the revival of ‘traditional’ suburban industrial estates, breathing new life into warehouses deemed redundant.”
The trigger point for a dedicated e-fulfilment warehouse is a key statistic, says Savills, and on average retailers considered it necessary to introduce a dedicated centre when between 10,000 sq ft – 25,000 sq ft was required for e-fulfilment.
One logistics provider for small to medium sized retailers suggested that the “tipping point” for a dedicated centre is 200,000 orders per annum.
Steven Lang, director of research at Savills, adds: “The e-tailing growth market is a complex sector which isn’t all about the big retailers and there is no single defined distribution model for the future of e-tailing in the UK. The rise of ‘dark stores’ and ‘click & collect’, coupled with the further demands for reverse logistics, provides a multitude of warehousing needs, for all types of re-tailing models. Add in the potential to serve customers internationally and the models increase in scale and complexity.”
The growth in online retailing is requiring retailers and distributors to invest in a specialist network of parcel delivery centres close to urban markets. This allows them to meet the growing need to deliver goods quickly, efficiently and without the larger storage space associated with traditional buildings.
Recent CBRE research also found that 77 per cent of retailers expect to offer smartphone web sites by 2014 and 85 per cent expect to offer free delivery in the near future. “As internet shopping and next day delivery become more widespread across Europe, effective and efficient distribution networks which facilitate a reduction in handling costs will become paramount to retailer success.”
It has already been noted that there is increasing demand from parcel companies as they vie for market share by reworking and extending the depth and penetration of their delivery networks. Charles Binks of Knight Frank says: “Parcel volumes have risen to record levels and as a result there has been a spike in demand from parcel companies.”
Roger Haworth of CBRE agrees: “We are witnessing a new trend with the parcel and related e-commerce sectors taking units of 50,000 sq ft – 100,000 sq ft on the doorstep of large conurbations to meet their delivery requirements. Royal Mail/Parcelforce is snapping up sheds of around 100,000 sq ft throughout the country and other operators are seeking small units such as the 40,000 sq ft unit that GeoPost/DPD has just agreed at St Paul’s Developments’ Smithy Wood development in South Yorkshire.”
Binks says Royal Mail’s Parcelforce has taken 700,000 sq ft in the last three months while DPD has been most active upgrading its network and has some 12 requirements outstanding round the country for warehouses between 30,000 to 50,000 sq ft.
Parcelforce is looking at bulk standard buildings of between 80,000 sq ft – 120,000 sq ft and has been successful in securing second hand space, recently taking an 111,000 sq ft warehouse in Beckton, East London, on a 15-year lease at a rent in the region of £8.60 per sq ft.
DPD is looking at a combination of built-to-suit and second hand units to meet its requirements. Like many 3PLs looking to fulfil e-commerce obligations, the parcel company owned by GeoPost is looking to operate a hub and spoke model where the hub will be bespoke, while the local depots can have greater flexibility as long as there is plenty of car parking as stock is moved quickly through them.
Gulliford says where parcel companies have to move quickly to gain market share, in particular with their urban logistics depots, existing buildings are well capable of adaption. “It is possible to adapt relatively modern stock built in the 1980s and 90s, it might not be perfect but a depot doesn’t have to be purpose built – the only snags could be circulation space and site density.”
He cites a 61,720 sq ft unit that has just been leased to DHL on the Premier Park Estate at Park Royal. The property is three times the size of its previous facilities. It has been mooted that bays could be taken away from the property to increase circulation.
Len Rosso of Colliers International agrees: “Older buildings on the traditional suburban trading estates are generally better suited [to parcel companies] with lower eaves heights, more level access doors than their modern counterparts and excellent location close to residential areas.”
When it comes to urban logistics, says Tim Johnson of Jones Lang LaSalle: “location is key” and much of the demand is being met by the existing supply. Parcelnet has just secured a second-hand 75,000 sq ft warehouse in Enfield on a ten-year lease with break at year seven at a rent of £8 per sq ft. He says: “Post code penetration is the watchword.”
Hubs on the other hand, says Johnson, do not need to be close to the end user because they tend to be very large requiring a relatively low density for circulation and car parking. “In general these buildings are quite different from the standard warehouses, being long and thin with lots of doors. They have dock levellers on the narrow side for big overnight deliveries, and level access loading docks on the two fat sides of the building for cross dock operation with 360 degree circulation.”
Developers are certainly well aware of the opportunities and though many are not in any position to speculatively build they are able to get their development sites oven ready with planning and infrastructure in place even for relatively small plots of land.