Liza Helps looks at how large logistics warehouses are changing to reflect industry demand…
There is no doubt that the logistics landscape is changing, but just how much and how fast is still open for debate.
Looking at the physical attributes of a big shed; to the naked eye there has not been that much of a change in the past five years. They are still mostly rectangular in shape, are outwardly clad in grey, have a gatehouse and some offices, and seemingly copious amounts of car and HGV parking. They tend to cluster along the motorways and junctions and dominate the skyline in such areas, but rarely physically intrude on our everyday lives.
Jon Sleeman of JLL says: “They have not changed that much and any changes that have occurred have been over a longer term. One could suggest that rapid change has been over-hyped. Many changes have been more incremental.”
However, that is not to say that change has not happened at all or that the pace of change is slow. The perceived change in the logistics landscape is dramatic – quite possibly because it takes place against a backdrop of a technological revolution, which has catapulted the importance of warehouses to the forefront of our consciousness.
The technological revolution has precipitated rapid change in the way we shop, work and live and in terms of shopping this has led to a lesser need for physical shops and a greater need for warehouses for storage and distribution.
Giles Tebbitts of Avison Young says: “The last five years have seen a substantial increase in the demand for distribution space across the UK, driven by the evolution of the way we live and shop. This structural change has not only caused the amount of take-up activity to increase across the sector year on year but has also driven efficiency in the use of space.”
According to research by the Investment Property Forum more than 30 million sq ft of logistical property is being added every year in stark contrast to a decade ago when less than three million sq ft of distribution centre space was built.
With a ten-fold increase in the amount of space being built it is no wonder change is perceived as rapid – it is quite literally in your face. And it is only going to get more pronounced if reports are to be believed. According to the Office for National Statistics (ONS), internet sales now make up over 20 per cent of all retail sales in the UK and between April 2018 and April 2019, online retailing had an overall growth of 10.1 per cent year-on-year.
Research by CBRE points to online retail in the UK representing over one third of total retail sales by 2040. It has already been established that every billion spent online requires one million sq ft of warehouse space (an online retailer requires three times the amount of warehouse space as a bricks and mortar retailer).
ONS figures for 2017 saw an increase of £8.2 billion spent online in the UK, compared to 2016 – equating to one in every six pounds spent in total. As well as an exponential increase in the amount of money being spent online the population itself is increasing, which will only add fuel to the fire.
A British Property Federation report by Turley Associates looking into the link between housing and warehouse space notes: “There is a clear link between homes and warehousing, both in terms of quantum and location. Households generate demand for goods of all types, from cars to carpets to coffee to clothes. In turn car manufacturers require component parts; cafes require coffee bean deliveries and so on. Logistics is the sometimes invisible but always essential tie between demand and supply within the economy.
“As the population grows and more homes are delivered across the country, additional space for the required logistics response will be needed to meet consumer demand. There is presently 69 sq ft of warehouse floor space for every home in England. If this relationship were to continue this would mean 21 million sq ft of additional warehouse floor space is required each year to match the Government’s annual target of 300,000 new homes.”
Warehousing is becoming more visible
Over the six years to 2018, there has been a 4 per cent increase in warehouse properties across England, increasing from 38,700 in 2012 to 40,100 in 2018. Units are getting larger, with the increase in floor space equivalent to 6 per cent (1.56 billion sq ft in 2012 to 1.66 billion sq ft in 2018).
Tebbitts says: “Structural change has caused the amount of take-up activity to increase across the sector year–on-year (notwithstanding political upheaval in the form of Brexit). Logistics requirements are expected to increase in step with the 10 per cent annual increase in online retail sales.
“Interestingly, the growth in the sector has been set against a backdrop of record employment levels. Since 2012, the number of people in employment has increased steadily across the UK, resulting in the lowest unemployment rates since the mid-1970s. This has created a unique situation and while historically distribution warehousing decisions have been made on a purely locational basis, there is now an understanding that access to the appropriate workforce may be just as relevant a factor in the decision-making process.”
Robin Woodbridge of Prologis notes: “Globally, our customers are telling us that availability of labour is a particular pain point.”
“Today the logistics sector employs around 8 per cent of the UK workforce but, according to the latest report of the UK Commission for Employment and Skills, will need approximately 1.2 million additional workers by 2022. Only 9 per cent of today’s workforce, in the logistics sector, is under 25, with nearly half being over 45 years old. While potentially creating 1.2 million jobs over the next 5-7 years, the sector also faces a significant challenge in attracting and training a younger workforce.”
Labour shortages impact significantly on operating productivity and capacity, especially in distribution centre clusters, where there is competition for workers. In his ‘Occupational Drivers of Investment Performance in the Logistics Sector’ report for the Investors Property Forum (IPF), logistics consultant Darren Hall says: “Operators are being deterred from locations with very low unemployment.”
He says: “There are many areas of the UK that have almost no locally indigenous labour force (once local rate drops below 2 per cent, there is effectively zero unemployment).
“It is not uncommon to find employers requiring short-term/seasonal labour to provide transport from more populous areas to fill the deficit.”
Recent data shows that the most popular cluster locations for distribution centres such as Hemel Hempstead, Milton Keynes, Lutterworth and the Golden Triangle within the M1, M6 and M69 motorways, have unemployment rates of 1.7 to 3 per cent, making access to local labour extremely difficult both for core staff and agency workers.
Len Rosso of Colliers says: “The economy is nearly at full capacity and that is cause for concern in terms of labour cost and retention.”
It is hardly surprising then that some occupiers are looking at non-core locations where unemployment levels are higher.
Tebbitts says: “Occupiers are placing greater importance on the availability and cost of labour and are now considering locations away from core prime areas.”
Hall agrees: “There is increasing evidence that the location strategies of some large e-commerce businesses are reflecting the dual attractiveness of comparatively low-cost facilities in the north of the country, especially on the M62 corridor) close to large population centres where unemployment rates are in the 4.5 – 7 per cent range.”
It is no surprise then that ASOS relocated from Hemel Hempstead to Barnsley and Boohoo decided to run its Prettylittlething.com operation from Sheffield and expand in Burnley rather than relocate further south. Indeed at the end of 2018 Amazon secured a 1.99 million sq ft pre-let at Citrus Group’s Integra 61 scheme in Durham. The location was chosen because of ample supply of appropriately skilled and flexible labour within close proximity.
Employment and transport costs make up the majority of overall warehouse running costs – some 45 per cent each. So the decision to locate away from the core areas is a matter of balance. Tebbitts says: “In considering alternatives to the prime locations where labour is scarce, the decision for the logistics operator is whether cheaper labour costs and better availability of workers, offsets the greater transport costs of secondary areas.”
Retaining and attracting staff in areas of high employment starts to become crucial. Woodbridge says: “The role of the warehouse and surrounding environment in helping occupiers attract and retain labour is increasingly important.
“We know from research among our occupiers and skills agencies that employees on logistics parks are increasingly motivated by enhanced welfare features such as an employee gym, proximity to local amenities, natural light and green spaces. For this reason, we are always looking for new ways to incorporate features within our buildings and on our Prologis Parks, which will help our occupiers attract and retain employees for the long-term.”
At Prologis Rugby Central Park, the company has refurbished a 376,563 sq ft warehouse with a 70,110 sq ft mezzanine and included an employee gym, contemplation room and above standard toilet and shower provision.
Tessa English of JLL says: “Where employment is tight it is not just about the building but whole estate amenities that is an important consideration for occupiers.”
Hall agrees: “Relaxation rooms and social spaces with games video and TV facilities, as well as gyms, prayer rooms and reading areas are all becoming increasingly popular in modern distribution centres. A canteen serving hot meals, usually removed on cost cutting grounds, is regularly cited in employee surveys as a feature many would like to have available once again.”
Many developers are looking at Well Certification linking health and well being of workers to the built environment within which they function. Automation is seen as a way round the inevitable issue of labour cost and shortages. Indeed Shop Direct is thought to be reducing its labour force by up to 1000 through its move to a fully automated NDC in the East Midlands from three warehouses it has in the North West – a move set to provide cost savings of some £25 million a year from 2021 when the facility is expected to be fully operational (See Box).
While this seems a perfect solution, Hall says automation is not a panacea as it has problems all of its own – the most pressing being the need for power. Automation require a lot of it and that in conjunction with the implementation of electric vehicles means occupiers need to seek facilities that can provide plenty of it.
Emma Hawkins of JLL notes: “Many occupiers are looking to over acquire power to future proof their buildings. One of the issues is the lack of understanding exactly how much power is required for automated systems and how these will develop in terms of efficiency in the future.”
Sleeman adds: “It’s not just having power for automation it is also for MHE charging and the expected rise in the number of electric vehicles that will require charging as well.”
Simon Lloyd of Cushman & Wakefield raises the point regarding the increased demand for chilled and frozen warehouse space in the UK. “With these even more power is required and increasing power to a location retrospectively is prohibitively expensive.”
Rae says that a chilled and frozen warehouse of some 400,000 sq ft nowadays will require 4MvA as opposed to a standard power availability of 1.5MvA.
Developers are looking to provide on-site power generation or at least the facilities for it with roofs capable of fitting photo-voltaics and space for battery storage within the warehouse design to store power generated during the day for use at night.
Roger Bryant of Savills says: “The theme wherever you look anywhere is disruption: VUCA – volatility, uncertainty, complexity and ambiguity and what contributes to that is the rapid pace of technological change.”
Labour and power availability and cost aside, how the supply chain will look in the future is difficult to foresee and predicting the type of building that will suit it is nigh on impossible when everything is changing.
Creating as much flexibility into what is built now therefore must be the only way forward.
Andrea Ferranti of Colliers says: “With uncertainty occupiers want more flexibility not only in terms of leases but also in terms of expansion. They require expansion land and higher buildings to scale up the operation and business as they grow.”
Prologis is offering expansion capability on its 535,000 sq ft industrial logistics building on Prologis RFI DIRFT. The building, known as DC535, is capable of expansion up to 940,000 sq ft. It will be ready for occupation in October 2019.
Site density also plays a role in the flexibility stakes says Rosso. Many occupiers particularly those with high throughput requiring a lot of vehicles need a lower site density to accommodate vehicle movement and parking. The land used can also double up as expansion land for the future.
Rosso says: “We are finding that lower site density is becoming popular even though rent is greater – most developments look to a site density of 45 – 50 per cent and low site density is 45 per cent and below.”
Lloyd says: “There is a drift towards lower site densities to accommodate vans and other vehicles but with land at a premium it can be difficult to achieve especially in core locations.”
While not being able to expand the footprint of a building without impinging on site density the only other way to create flexibility is to go up. There has been a shift to construct ever-higher warehouses and the adoption of mezzanines by the likes of Amazon. It is not uncommon to find warehouses of 20m and higher built speculatively.
Tebbitts says: “The market is observing a shift from traditional heights of 10 – 12m to taller buildings of 15 to 21m. Automation can allow businesses to operate at even greater heights of 22 – 30m. In addition automated systems are now regularly embedded into multi-tiered mezzanines floors, which means businesses are starting to use space to its full potential and measure space by volume.”
Hall says: “Going forward buildings will have to be more flexible in design not just to expand but also for periods of contraction allowing occupiers to add space and/or sub divide units.
“Increasing penetration of automation and robotics will lead to larger units with higher eaves, stronger floors and a higher requirement for access to higher levels of power (2MvA to 6MvA).”
Shop Direct consolidates in East Midlands
In 2018 Shop Direct announced that it would be closing three warehouses in the North West and consolidating to a single NDC in the East Midlands. For such a successful business with an annual revenue of some £1.96 billion, the question had to be asked: why?
If it is not broke why fix it?
Phil Hackney, chief operating officer at Shop Direct explains: “Our existing fulfilment operations across three sites in Greater Manchester have supported Shop Direct on the journey from catalogue business to one of the UK’s largest pure-play digital retailers.”
The company delivers 49 million products every year dealing with more than 1,800 brands across fashion, electrical, furniture and homeware including seasonal categories to some 4 million customers nationwide
“However, we knew that to continue meeting growing customer demand, we needed a new, purpose-built and automated facility in a well-connected location. It also had to have space for future expansion. The decision to relocate our fulfilment operation to East Midlands Gateway was a difficult one, but ultimately right for our business.”
“As part of an 18-month project we reviewed our existing fulfilment sites in Greater Manchester. We found that limited accessibility, layout and loading restrictions, coupled with a lack of space, meant that they couldn’t sustain our future ambitions.”
“Our [supply chain]model means we don’t have hubs across the country; we operate from a single location and deliver UK-wide. We knew we had to situate our operation in a central, well-connected location to service later cut-off times for next day delivery and give us future optionality for same day delivery.
“We looked at a number of different options but selected East Midlands Gateway. This optimal location – right in the centre of our customers – will support even more reliable delivery and give us the ability to increase our next day delivery cut-off from 7pm to midnight. We’ll also be able to introduce new delivery options for customers in the longer term.”
As well as looking at optimising delivery times the company is taking the opportunity to upgrade and automate the new facility to reduce the time it takes for items to be processed. This will include automated item selection, advanced picking, a single and multi-order automatic packaging facility, and automated sortation capabilities.
“It will allow products to be processed through the fulfilment centre from order placement to ‘ready for dispatch’ in 30 minutes. That’s a lot faster than our current facilities.”
As a result of the automation, the size of the workforce can also be substantially reduced – the company is looking to have 500 full time and up to 300 seasonal workers during peak periods.
“The automated technology, which is now in production, as well as the consolidation of three sites into one fulfilment and returns centre, will contribute up to £25 million in efficiency savings per year for the group from 2021. It’ll also significantly enhance our retail proposition.”
“We anticipate that the central UK location will save approximately one million road miles per year once we are fully operational, due to our new in-house sortation capability and a greater use of rail. The rail freight terminal also means we’ll be able to get product from our UK and overseas suppliers to our fulfilment centre more quickly, improving availability and service.”
Biggest pre-let for Timberland
In one of the biggest pre-lets of the year US Fashion giant VF Corporation – owner of Vans, Timberland and North Face – secured 579,000 sq ft of space on the second phase of developer Mountpark’s Mountpark Bardon scheme in Leicestershire.
Phillip O’Callaghan of Mountpark says: “The client had a lot of particular specifications, which we were able to incorporate to secure the deal.
“Power, location, height, expansion land, labour were all relevant. We had to submit a new planning application to raise the eaves as they wanted up to 22m, they had a big power requirement because the building is going to be automated. “One of the other challenges is that they are growing business so we had to incorporate expansion land for them.
“Location was very sensitive – this is an NDC they needed to be in the Golden Triangle
The second phase of Mountpark Bardon, a 72.5 acre site, had planning to deliver 1.3 million sq ft of logistics space. It benefits from a completed £4.5 million infrastructure programme and the site can deliver design and build units from 200,000 sq ft within a 40 week programme.
DTRE and CBRE act for Mountpark on Mountpark Bardon II.
This article first appeared in Logistics Manager, July 2019.