Commercial Insights - Industrial Warehousing: A Race for Space?
May 2020
4 minutes to read
What we know
Warehouse capacity under pressure. With many retailers and manufacturers halting operations to counter the spread of COVID-19, a log jam is being generated at UK warehouses. The UK Warehousing Association stated this week that a lack of available warehouse space in the face of COVID-19 restrictions is reaching a critical point. The main problem? Inflows are continuing, with orders placed and dispatched before the lock down reaching destinations. Demand for consumer goods such as clothes and cosmetics however have plummeted, meaning outflows have been severely reduced.
Car manufacturers opening up. As countries begin to relax COVID-19 restrictions, car manufacturers in the UK are gradually restarting operations. Jaguar Land Rover (JLR) announced this week that it will resume vehicle production at its UK manufacturing plant in Solihull from May 18. Nissan are also preparing to resume production at its plant in Sunderland.
Air cargo in decline. Heathrow recorded volumes of just over 100,000 tonnes in March 2020, the lowest monthly total since 2009. A contraction in global manufacturing outputs has resulted in slower in UK imports and air cargo freight.
What the numbers say? In Q1, take-up of units over 50,000 sq. ft. reached 6.6m sq. ft., which compares to around 9.5m sq. ft. in Q1 2019. Our analysis shows an immediate need of up to 5.5m sq. ft. nationwide for short-term occupation. This is principally to grow warehousing capacity for food retailers, adhere to distancing requirements at fulfilment centres and to accommodate the disaster management measures deriving from the NHS and local government.
What we expect
Mixed messages regarding Retail. Whilst warehousing demand derived from retail is, on the whole showing sustained growth, some parts of retail are encountering critical challenges amid the COVID-19 crisis. Fashion and other non-essential retailing for example have experienced sharp fall in sales seeing some retailers suspend online shopping services and closing their distribution centres. Raising capital has quickly become a priority for many. Online fashion retailer Asos has raised more than £200m from shareholders as it seeks to mitigate the effects of a coronavirus lockdown that has reduced consumers’ appetite for fashion. Similarly, Next have been the latest to explore sale and leaseback opportunities by marketing three distribution warehouses and their HQ building. Further examples of this strategy will surface as the retail sector continues to struggle.
Tenants requesting assistance will rise. Although rent payments in March were largely paid as required, it will be in June when the scale of any cash flow challenges are clearer. Tenant requests regarding rent holidays or altered payment plans such as monthly payments will increase in order to help maintain a manageable balance sheet. Smaller, multi-let units tend to have shorter lease terms and therefore are perhaps more exposed to any occupier distress.
Development timings impacted. In addition to complying with distancing measures, developers are also facing a shortage of building materials due to supply chain disruptions. The proposed timings of many developments will encounter slippage, meaning vacancy rates, already historically low in some markets, could tighten further. In addition, speculative schemes that are yet to commence could now be postponed indefinitely as developers await clarity on the scale of post-crisis demand.
What we question
Supply chains re-aligned? The coronavirus pandemic has exposed areas of weakness and the vulnerability in supply chains across industries. As companies take stock and restructure in the wake of the crisis, could an upturn in the reshoring of operations and renationalising supply chains be a preferred method to mitigate future risk?
Will COVID-19 expedite the shift to online? The UK is already the largest online shopping market in Europe. The structural shift has led to upturn in demand for warehousing through the expansion of e-commerce and related services. The need for large scale fulfilment and ‘near-urban’ warehousing has been the primary driver of take-up in recent years. The COVID-19 crisis has meant a forced acceleration of the shift to everything online. Some are using this method for the first time, with food delivery in particular now the norm for many people who wouldn’t bother in the past. Will this leave a permanent legacy?
Will business risk management drive warehouse demand from data centre operators? The current COVID-19 crisis has quickly brought business resilience to the forefront of attention. Integral to this is digital infrastructure and as such, data centre capacity will clearly be an area of scrutiny moving forward. As business across all sectors incorporate new measures to minimise operational risk, data centre capacity is likely to be an area for increase. Although data centre companies represent a small percentage of demand for UK warehousing, operators will clearly need to respond to rising demand for their services. Could data centres therefore play a bigger role in UK warehouse demand post crisis?