Why flexible warehouse options are set to rise
Firms may seek more flexible warehouse options in order to respond to future supply disruptions, as May sees reduction in inventory levels.
4 minutes to read
Economic uncertainty and inflationary pressures
UK inflation remains stubbornly high. The Consumer Prices Index (CPI) rose by 8.7% in the 12 months to May 2023, unchanged from April, though core inflation had accelerated. The Bank of England responded with a 50bps rise in interest rates in June, taking the base rate to 5.0% and putting further pressure on borrowing costs.
With borrowing costs elevated, both consumers and firms face higher debt servicing costs. As a result, manufacturers are facing weaker than anticipated order books and falling sales rates which are pushing up stock levels.
June’s manufacturing PMI reading (46.5) continues a 10-month stretch of sub-50 readings and demonstrates the sector remains stuck in contraction. Weaker confidence and market uncertainty were cited as the main factors dragging on production.
However, while there are clearly headwinds, consumers are still spending, the labour market remains buoyant and a majority of manufacturers still forecast growth over the next 12 months. These factors should support continued occupier demand.
Rise in available space
Take up volumes have fallen, with a preliminary total of 12 million sq ft occupied in H1, compared with 26.5 million sq ft in H1 last year and a pre-pandemic average of 17 million sq ft.
In contrast to the last few years, when logistics operators and online retailers were seeking to rapidly expand their capacity, economic uncertainty and inflationary pressures are now leading to a more cautious approach.
Preliminary Q2 2023 figures show the vacancy rate to have increased to 4.7%, from 4.0% in Q1 and is expected to rise further throughout the second half of the year.
The rise in the amount of space available has been driven by second-hand space coming back to the market as well as speculative development completions. Although heightened development and financing costs have capped the amount of new schemes currently getting underway, with take up levels currently suppressed, some of this newly available space could be offered up on a flexible basis.
Cost conscious occupiers
Greater economic uncertainty and higher borrowing costs mean that many occupiers will be reluctant to take on additional or more costly facilities. Companies in the UK have deleveraged significantly since the global financial crisis. However, expansion plans are often funded (at least in part) by debt. As a result, even growing firms maybe wary about committing to additional or larger facilities at present.
Firms looking to expand their operating capacity or extend their operations into new markets may look to test the market, taking temporary or flexible space rather than committing to long lease, or taking on debt to fund a costly fit-out.
Flexible storage options can allow a firm to de-risk their operations, avoid long-term lease commitments or excess space, and hire space according to their requirements in terms of quantum of space and length of time required
Supply chain issues and threats
Numerous events have led to major disruptions to supply chains in recent years and manufacturers and logistics operators have become acutely aware of the risks. Firms’ calculations of buffer (or safety) stock requirements has been impacted by the lengthy lead times experienced during the pandemic.
In broad terms, fewer supply shortages encouraged suppliers to reduce their inventory levels in May. Holding additional stock costs money and firms will not want to do this unnecessarily.
However, firms may seek greater agility and thus flexibility, in order to better respond to potential disruptions in the future.
Investors seek to maximise income
Higher financing costs mean higher required returns and with weak or negative capital growth at present, investors must look to income to drive returns.
Offering space on a flexible basis could help protect against voids, with the potential to secure higher rents.
A flexible operating model does come with additional operating costs. It requires active management and will not appeal to investors seeking a passive income from a long lease. However, an operating partner could manage this.
Who is doing this?
Prologis has recently partnered with Bis Henderson Space to offer a flexible warehouse model. A 335,000 sq ft unit at Prologis Park, Wellingborough West, East Midlands will be offered on a flexible “pallet-by-pallet” basis.
Rather than adopt a fully flexible warehouse leasing model, some landlords may be more flexible regarding the terms of the lease.
Landlords are likely to show a greater willingness to adapt to the needs of the occupier, for example, accepting shorter lease lengths, more frequent break options or leasing part of the premises. Tenants may then have flexibility in terms of expanding or extending these leases.