Urban logistics - Not just last-mile

A record 51.6 million sq ft. space was taken in 2020 (in units over 50,000 sq ft.) and a further 46.9 million sq ft. has been taken so far in 2021 (Q1-Q3), demonstrating the robust occupier market for UK logistics space. E-commerce has been a strong driver of tenant demand, with retailers and distribution firms accounting for 76% of take-up in the first half of 2021. However, the manufacturing sector has increased its share of take-up, accounting for 19% in the first half of this year.

Tenants in the urban logistics market are typically third-party logistics companies and UK businesses that deliver goods to businesses or to consumers and require last-mile or e-fulfilment services. The growth in the on-demand grocery delivery market has given rise to several new companies offering grocery home deliveries within a matter of minutes. Companies such as Weezy, Getir, Zapp, and Gorillas are increasingly taking space in urban centres across the UK. They operate from small dark stores or micro-fulfilment centres located very close to their customer base. Their rapid fulfilment operational model means they can not locate further away from their customers. The "race for space" in these location is driving up rents.

Manufacturing in UK cities

Manufacturing was once a prominent feature in UK cities. Across the UK’s top 11 major cities, there were more than 1 million people employed in manufacturing in 1984. Over the following 35 years, the sector lost 697,000 jobs, equivalent to 68% of the workforce. By the end of 2019, there were just 335,000 employed in manufacturing across the top 11 cities. In percentage terms, Nottingham has seen the sharpest fall, with a loss of 77% of all manufacturing jobs over the past 35-years. Despite losing half of its manufacturing jobs, Cardiff fared better than the other top ten cities, followed by Leeds (-58%).

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Not Just Last-Mile

Demand for urban logistics space is not all to do with e-commerce (though it accounts for a significant proportion), it also reflects a need for supply chain resilience. While ‘just-in-time’ supply chains limit the need for storage and thus reduce the need for warehousing space, Covid-19 highlighted issues with this model as supply chains from Asia were shut off. As a result, we have seen a reshoring or near-shoring of manufacturing operations, with operators moving facilities closer to the end consumer.

The Suez Canal incident in March and the more recent HGV driver shortages have further underscored the importance of supply chain resilience. Suppliers are looking to increase their stock holdings, and develop shorter, more dependable supply chains to ensure their operations can withstand any further shocks.

Is there potential for reshoring manufacturing within urban areas?

Bringing manufacturing back to the UK and into urban areas has the benefit of building resilience into supply chains but also enhances their sustainability credentials, and enables faster turnaround times for consumers. There is strong government support for retaining and bringing new manufacturing industries to UK cities. However, historically industrial land has been undervalued, and eroded, with other use classes given priority. This has meant a shrinking manufacturing base across UK cities. Employment in the manufacturing sector has fallen across all cities. However, some cities are nurturing growing advanced engineering and manufacturing centres.

UK cities once thrived as centres for manufacturing but many industrial activities were unsightly and polluting. Much of the UK’s manufacturing base was moved outside of cities or sent overseas, to remove the negative impacts of heavy industry and take advantage of cheaper production to boost profit margins. Although production was offshored, the design base was typically retained in UK cities. Now, new technologies are changing that, reuniting the design and production functions. New technologies offer cleaner, flexible, scalable solutions and many of the drivers that led to offshoring are no longer applicable.

Advances in technologies such as 3D printing and additive manufacturing are changing the ways that we make goods, and bringing manufacturers closer to their customers. These technologies allow for efficient small-scale production, meaning designers can develop and create prototypes extremely quickly and replacement parts can be easily printed and dispatched to consumers. 

The new, post-Brexit, UK-EU trade deal means that traded goods must meet requirements on "rules of origin" in order to benefit from duty and quota free trade. These regulations are set to tighten over the next few years. UK manufacturers will also have to reduce their dependence on components manufactured outside of the region and may need to reshore or nearshore some of their supply chains.

Creative Industries

There has been a rise in alternative uses for urban logistics space, which is adding to demand. For example, film studios have been acquiring space recently. Netflix, Pinewood Studios, Warner Brothers, and Garden Studios have taken space in London over the past couple of years. The media sector has also been a growing source of demand in Cardiff, with Great Point Media and Urban Myths Filming both taking space recently.

Limited supply

Demand for urban logistics units is driving down vacancy rates in urban areas. Across the UK, the vacancy rate for units under 100,000 sq ft and located in urban areas, is just 3.2% and is expected to fall further. In Greater London, the vacancy rate (units under 100,000 sq ft) is just 3.1%, in Bristol it stands at just 1.5% and in Edinburgh, Birmingham, and Manchester, vacancy rates are less than 1%. This compares with a vacancy rate of 5% across the UK, for all unit sizes over 50,000 sq ft. 

Development opportunities are limited in urban areas and much of the existing space is in older units. There is a desire to intensify industrial land or combine it with other uses. The new London Plan (2021) acknowledges the rising demands on industrial land, in part due to the growth in e-commerce, and the role it will play in the coming years. Research from the Greater London Authority (GLA) has stated that there will be a positive land demand for industrial land in the coming years. As a result, the amount of Strategic Industrial Land (SIL) to be released before 2041 has been limited to 233 hectares.

The lack of space and development opportunities is driving robust rental growth for industrial assets across urban areas. With particularly strong growth being recorded in markets in London and the South East region.

Outside of London, markets in the Eastern region feature highly in the top ten for rental growth. Many of these markets are within close proximity to London. Manchester, the UK’s second most populous city (after London) also features in the list of top markets for rental growth.

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