Labour cost and availability has risen up the agenda for occupiers. Liza Helps investigates just what that means in terms of the location and type of warehouse to look forward to in the future.
At present the logistics sector employs around eight per cent of the UK workforce, and according to the last report of the UK Commission for Employment and Skills, will need approximately 1.2 million additional workers by 2022. Only nine per cent of today’s workforce in the logistics sector is under 25, with nearly half over 45 years of age, it’s a bit of a problem because the industry is also suffering from a shortage of workers right now. According to the Freight Transport Association (FTA) there is a shortage of 52,000 HGV drivers alone at present with 77 per cent of haulage firms struggling to fill positions. The boom in e-commerce and on-line retailing is fuelling demand across the sector with vacancies increasing 45 per cent this year alone. Job creation in the logistics sector saw an extra 66,000 jobs added year-on-year according to the latest skills shortage report by the FTA. And it is not going to get easier to recruit with Brexit looming; it seems that the government is unaware or is deliberately ignoring the problem in the logistics industry, as it tries to marry up restricting the free movement of people with free movement of goods and trade. The government’s recent Migration Advisory Committee’s (MAC) report on European Economic Area worker status has failed – according to both the UK Warehouse Association and the FTA – to acknowledge the value these workers bring to the nation’s economy and how important their role is in ensuring that Britain can keep trading after Brexit, FTA’s head of skills Sally Gilson explains: “The MAC report totally fails to recognise, and actively diminishes, the role of lower-skilled migrants within the UK’s economy. The job roles covered by these workers are often based in areas of low unemployment where competition for workers is already high, so Britain’s supply chain could easily be at risk if they are forced to return to their home countries. Yes, highly skilled workers are valuable to the economy, but so too are those whose work keeps us able to operate at home and at work, 24 hours a day. “The logistics sector, especially when you consider roles such as HGV drivers and warehouse staff, is reliant on access to non-UK workers, currently employing 43,000 HGV drivers, 113,000 warehouse workers and 22,000 van drivers from the EEA – and even more during peak times of year like Christmas. “Due to the regulation of the sector, logistics businesses cannot immediately look to other non-EEA countries to help plug the gap, which losing these European workers will cause. The MAC report recommends changing the system by which workers are assessed on their eligibility for working status in the UK, but this actively discriminates against the lower-skilled workers. “The changes the MAC proposes to the system which determines the criteria for the shortage occupation list don’t go far enough. They would restrict those roles, which require specialist training but do not meet the requirement for a Level 3 or above qualification.” UK Warehousing Association chief executive Peter Ward has also expressed disappointment and frustration that the government seems not to have recognised the critical labour shortage facing the warehousing and logistics industry; a sector that depends on immigrant labour – particularly at peak times, such as Black Friday, Cyber Monday and Christmas. Ward says: “It is vital that the government understands the need for low-level, low-skilled workers. Work permits for level 5 educated employees on salaries over £30,000 will simply not help our sector.” UKWA has repeatedly highlighted the impact of the so-called ‘Brexodus’ of Eastern European migrants leaving the UK since the Brexit vote and has voiced the deep concerns of members – including major retailers – that the proposed government cap on immigration post-Brexit will severely exacerbate the labour crisis.” The availability of labour and the cost of labour is now one of the main criteria for occupiers looking to secure warehouse space in the UK. Alex Ferguson managing director of environmental and geo-technical consultancy Delta Simons, which advises commercial industrial and residential developers notes: “Every other conversation is about this [labour]. It is now a site selection criteria where it had not been previously.” “It is one of the things we are hearing consistently that occupiers are talking about,” says Kevin Mofid, head of industrial research at Savills. “The crucial factor [for site selection]is the availability of labour.” Josh Pater, partner at Gerald Eve, says: “Logistics operators we work with consistently rank availability and type of labour among the top three considerations when searching for new distribution centres.” Jon Sleeman and Tessa English of JLL agree. Leading and working in the research department at JLL, they note a marked uptick in demand for more detailed labour market data from clients searching for suitable accommodation or sites for development or investment. Sleeman says: “Investors and developers want more information on the local labour market to be able to analyse particular locations and their suitability. Reports for occupiers look at labour catchment and characteristics – we are scrutinising [the labour market]more closely.” Bjorn Hobart, of specialist logistics investor Tritax Big Box REIT says: “In terms of operational cost, labour is one of the most significant overheads of an occupier’s warehouse operation.” Jonathan Compton, head of UK logistics strategy at CBRE, agrees: “When looking at overall operational costs rent is a very small part, roughly 5 per cent, which fades into insignificance compared to labour at between 20 – 25 per cent and transport at 40 per cent. “However, while you can get round rent and transport costs in other ways in any particular location – labour is critical.” For Sleeman its availability or not – as is the case – is a ‘showstopper’. He says: “Frankly, you cannot run a warehouse without labour.” Hobart adds: “Availability of appropriate labour and staffing costs will be crucial in determining location for some occupiers’ operations…Some occupiers maybe tied to a specific logistics location so are forced to accommodate the limited availability of appropriately skilled, affordable workforce. In such circumstances, occupiers often try to address this issue by providing transport links to the wider area outside the typical warehouse operative radius, which of course becomes an additional cost. However, where they have choice, labour is one, if not the, most important considerations. “In terms of developers/investors/funders; there is certainly a growing awareness among informed parts of the market and they are considering this in their assessments of assets and in the marketing of their vacant assets.” And it is this scrutiny that is changing the dynamic of site selection. It is not necessarily now all about: location, location, location… Jonathan Wallis, development director of developer dbSymmetry says: “If you look at the key influences of decision making for where a distribution company is going to be located – depending on its nature – the top three at the early stages are planning, power and labour. “It is interesting to see that some of the traditional established estates, such as DIRFT, are losing out to other less established locations due to occupier perceptions on labour – its availability and cost.” “Labour availability,” says Jason Print partner at Gerald Eve, “remains a consideration of all warehouse occupiers, and anecdotally you hear rumours of firms ruling sites out due to such concerns, but quite often it is more a reluctance to move away from an existing workforce. “Many occupiers would prefer to retain their staff in a secondary location rather than relocate to a prime site, even if the move brought haulage and distribution cost savings.” Mofid adds: “Supply chains have traditionally been situated in key industrial locations in the midlands and the south east, such as Northampton, Park Royal, Daventry and Rugby. Moving forward however, a significant lack of supply, coupled with factors beyond the control of landlords and property developers such as the availability of land, labour and energy provision will mean markets that are currently viewed as secondary are set to become prime hotspots, particularly along the M5, A1 and A14 corridors.” It is no surprise therefore to see occupiers, particularly of larger facilities, looking to what otherwise would be considered secondary locations. BSH Home Appliances, part of the Bosch Group, has located at Frogmore and developer Mulberry’s 2.6 million sq ft Midlands Logistics Park in Corby, Northamptonshire, because of the site’s proximity to a large skilled available workforce. Indeed when looking in depth at the labour cost and availability it has been reported that Corby has one of the largest pools of logistics and warehousing staff in the county Corby’s population grew by 14.5 per cent between 2001 and 2011 – double the regional average. And, it has been said that this growth is set to continue, with North Northamptonshire setting a strategic house building target of 33,851 by 2021 to meet expected demand. Detailed analysis of the 30 minute drive time catchment around the Midlands Logistics Park shows over 13,000 logistics workers, significantly above the level of logistics employment in Corby, and over 14,000 unemployed. So recruiting for 500 warehouse workers would represent less than four per cent of locally available logistics workers and unemployed. With the fundamentals this good Tritax has agreed to forward fund the BSH Home Appliances facility to the tune of £89.3 million, reflecting a net initial yield of 5.2 per cent. The property will comprise a cross-docked facility with 360-degree circulation, a minimum eaves height of 15m, together with extensive parking and a site cover of approximately 50 per cent. The new prime facility will be purpose-built to a high specification with a gross internal area of c.945,375 sq ft; it will become BSH’s largest UK distribution centre. The property benefits from direct access onto the A43 dual carriageway, which has recently been upgraded, thereby providing improved access to the M1 southbound, the M6 and A1(M) via the A14 dual carriageway. MLP is capable of potentially accommodating approximately 5 million sq ft of logistics space and benefits from a 500-metre rail siding and yard for a potential future connection onto the rail freight network. This potential bi-modal connection for MLP would provide enhanced connectivity for the site to the UK’s ports and cities. Letting agents on the scheme are M1 Agency, Burbage Realty and CBRE. Upon practical completion of the construction, targeted for Autumn 2019, the property will be let to BSH on a new 10-year lease, subject to five yearly upward only rent reviews. Amazon has also elected to secure an off-prime facility citing access to labour as one of the main factors in its decision. It has taken a pre-let at dbSymmetry’s 77-acre Link 66 scheme in Darlington (now known as Symmetry Park Darlington) in the North East. The 1.5 million sq ft facility is being forward funded to a tune of £120.7 million by Tritax. The development will comprise a cross-docked facility with 360-degree circulation, an eaves height of 18 metres and low site cover of approximately 32 per cent. The new prime facility will be constructed to a high specification with a gross internal floor area of 1,508,367 sq ft. The ground floor will extend to around 542,060 sq ft surmounted by two structural mezzanine floors. The property will benefit from significant capital investment by the occupier, including high levels of automation. The site forms part of Link 66, an emerging logistics location situated on the eastern edge of Darlington at the junction of the A66 and A1150, with excellent motorway connectivity via junctions 57 and 58 of the A1(M). The planned Darlington northern bypass will link the A1(M) at junction 59 to the A66 roundabout adjacent to the subject site. The location also benefits from close proximity to the cargo ports at Tees and Hartlepool, access by air via Durham Tees Valley Airport and by rail from Darlington railway station. Upon practical completion of the construction, targeted for summer 2019, the property will be leased on a new 20-year lease, subject to five yearly upward only rent reviews. Tritax partner Colin Godfrey says: “Traditional prime locations could be an outmoded concept. Prime is where occupiers want to be, and increasingly that is where they can source available, appropriated skilled and affordable labour.” And it looks like prime is where labour can be accessed most easily. Developers and developer investors are now actively seeking to speculatively build in these type of locations. Gazeley is developing a 278,000 sq ft warehouse at G-Park Doncaster in South Yorkshire. James Atkinson, Development Manager at Gazeley, says: “The case for locating in Doncaster is clear and compelling. The area offers a large workforce of logistics and transport sector specialists. Its proximity to the M18, M1, A1 and wider motorway network will give our customers unrivalled access to the UK’s largest markets. The new building, which will target leading logistics, distribution and e-commerce companies and will be available from Spring 2019, will include a 50-metre service yard, 38 dock doors and 4 level access doors, allowing for greater HGV access. IM Properties is speculatively building a new 532,000 sq ft mega shed at Hinckley Park, adjacent to junction 1, M69, in Leicestershire. Richard Lawrence, development director for IM Properties says: “The Midlands is a consistent performer as connectivity and the ability to deliver becomes a key differentiator in the rapid growth of the e-commerce industry in particular and operators need to be centrally located. “Hinckley 532 offers immediate access to the motorway network and a large, established workforce, already a draw for DPD, and a big determining factor in our decision to speculatively build the unit.” Hinckley 532 will be built alongside a 318,254 sq ft £150 million super hub for DPD, which has already committed to the 82-acre employment park and will create Europe’s largest automated parcel depot. But what type of buildings are they actually building other than being increasingly large? For the most part the designs for these new warehouses are beginning to play a part in helping occupiers to attract and retain staff. Known as wellness, developers are looking at providing design led faculties and facilities aimed at workforce comfort, health and safety. These include access to direct light via more windows and roof lights, comfort cooling in office and venting in the warehouse to keep temperatures even, to the provision of canteens and gyms as well as landscaping nature trails and using fire track as running tracks. “Worker friendly warehouses are de rigeur and wellness is the new sustainability,” says Mofid. “It’s all about the retention of staff.” Sleeman agrees: “We are not talking about sustainable buildings from an ecological point of view but from a societal one. Why should they not be nice places to work?” Obviously that does incur a cost. Ferguson explains: “If you only look at what you pay the labour force you will never get it to stack up, however if we look at factors such as absenteeism, staff churn, sick days and presenteeism, there is a real cost and wellness starts to stack up.”
Bigger bang on-line
Online shopping is contributing to a huge growth in the amount of warehousing needed in the UK. About 235 million sq ft of warehouse space was leased or purchased between 2007 and March 2018. That figure is up from about 130 million sq ft in the previous decade reports property consultant CBRE. There is just physically nearly double the amount of warehouse space in the UK than there was ten years ago. “Demand has been unprecedented,” says Andrew Marston, UK industrial and logistics property researcher at CBRE. Research by property firm Savills concurs: take up of industrial and logistics space by online retailers has grown 731 per cent since 2008, as occupiers continue to build their supply chains to keep up with consumer demand, it reports, going on to predict that this is set to increase further still as events like Black Friday and Cyber Monday continue to transition from in-store to online. In 2000, about three per cent of all retailing went through the internet. In 2017, the figure was 17.8 per cent peaking at 19.9 per cent in November 2017 according to the Office for National Statistics. The prediction for the whole of 2018 is 19.1 per cent. In effect online shopping has gone from three per cent to a fifth of all retailing done through the internet. Savills figures show that between 2008 and 2009 just 1.47 million sq ft of warehouse space was taken by online retailers, compared with 12.23 million sq ft between 2016 and 2017. Growth has come from online retailers, a number of which have been rapidly expanding their distribution networks. Parcel delivery operator DHL Express has invested more than £150m in its parcel delivery hub in the East Midlands to make it its biggest UK operation. About 900 staff work all night long to process 190,000 packages and parcels for international businesses. “The pace of change is incredible,” DHL Express chief information officer James Holmes told the BBC for a report. “A few years ago, we would not have seen any online shipping coming through here. But now 60 per cent of all volume is e-commerce. That’s what the future is.” All set for a record year in take-up
Take-up of warehouse space totalling more than 100,000 sq ft with 10m eaves in the UK Logistics market is set to beat previous records following a strong third quarter according to property pundits. CBRE research notes that take-up in Q3 2018 was 4.266 million sq ft in 20 transactions. Of this, 36 per cent were buildings that had previously been occupied and 64 per cent being brand new. The past three years have witnessed a surge in logistics take-up from online retailers. In the first six months of 2018, they took 32 per cent of space. However, in Q3 their share reduced to around 13 per cent with the greatest representation being from the Third-Party Logistics operators (3PLs) at 35 per cent in eight deals followed by food retail at 23 per cent. To put 2018’s performance into perspective, take-up to the end of September was 21.83 million sq ft in 72 deals. Comparing it to the record year of 2016, at the same stage take-up stood at 22.46 million sq ft in 84 deals says CBRE. “However, the key difference is that there is currently 5.11 million sq ft under offer in 19 buildings, which is significantly more than at the same stage in 2016.” CBRE is also aware of a number of requirements for large amounts of space that have good prospects of transacting this year. As such, the record level of 29.3 million sq ft in 2016 could be under threat. According to research by Colliers 2018 take-up may breach 30 million sq ft “Take-up for [warehouse units]of 100,000 sq ft plus has been consistent over the last five years averaging 27 million sq ft.” Research by CBRE notes that availability of space in the UK, excluding the under-offer units, stands at 28.2 million sq ft in 132 buildings, which represent around 12 months supply on current take-up levels. Of that, there are currently 45 speculative buildings being constructed amounting to 9.14 million sq ft. Jonathan Compton, head of UK logistics strategy at CBRE, says: “We have seen the logistics sector continue to perform well from both occupational and investment perspectives and expect that to continue. The demand and supply imbalance remains an issue. The planning system is not helpful in enabling developers to be flexible and provide warehouses quickly. However, there a number of new speculative schemes coming on stream with an unprecedented number of 500,000 sq ft plus warehouses currently being speculatively built. “Looking forward to the remainder of this year and into 2019 we anticipate seeing more of the national high street retailers looking to take additional warehouse space as they actively grow their online platforms”.
This feature first appeared in the November issue of Logistics Manager.