The logistics sector is in a state of flux. The rise of automation, self-driving cars, last-mile deliveries and political pressures are among the factors compelling industry players to reconsider their operations in a rapidly changing market.
The latter two in particular have constricted land supply in crucial locations. Martin Meech, group property director of Travis Perkins, underlined a “crisis of space for services” to keep the London market, and by extension the industry across the UK, afloat.
At EG’s Industrial & Logistics Summit on 27 November, panellists debated the challenges facing the sector, as well as the practicalities of potential solutions.
Dealing with deliveries
Customer expectations for next-day and day-specific deliveries have increased exponentially over the past few years, as the ecommerce industry continues to thrive.
To cope with market expansion, real estate firms are battling to secure enough land to meet demand, particularly when it comes to last-mile distribution in London. And the competition is getting tougher.
Philip O’Callaghan, managing director of UK and Ireland at Mountpark, said: “We are seeing huge demand for logistics properties from retailers across our portfolio.
“We are trying to get new areas of land designated for logistics development, which can be difficult, especially for last-mile locations where we are often in competition with residential developers.”
Mountpark is also focusing on speculatively building in “a number of urban locations” to meet demand for units that can provide same-day delivery.
“Unsurprisingly these have been taken up quickly, and are mainly retailer-led,” he said.
Seizing regional opportunities
Outside the capital, there is an opportunity for the industry to capitalise on last-mile opportunities in areas with strong industrial strategies, such as the West Midlands or Greater Manchester.
But these regions are particularly vulnerable because they are not protected by measures such as policy E4 of the draft New London Plan, which makes provision for industrial and logistics land.
Ben Taylor, planning director at Barton Willmore, noted that first-generation employment sites that could respond well to urban logistics risk disappearing for residential uses.
“There is an opportunity to start thinking about last-mile deliveries in these urban areas before they get too dense,” he added.
While Amazon has set the benchmark for delivery services, the rest of the retail industry continues to trail behind. Ben Nowlan, chief revenue officer of store-to-door delivery provider On the dot, highlighted that many retailers are not in locations that suit same-day delivery, and are working on plans “five years behind Amazon”.
O’Callaghan added that most third party logistics providers are also rewriting their business plans because they have realised their distribution of warehouses is “historical in a massively evolving market”.
“It is incredibly fluid and I don’t think there is an immediate real estate solution,” he said.
When it comes to industrial, retailers are still in the driver’s seat. Figures from Radius Data Exchange show the number of retailers taking space in logistics units rose from around 38% of the entire sector to circa 46% in the past five years.
The proportion of planning applications submitted by retailers has also risen to nearly 9%, from 5% during the same period.
To ensure the industry is proactively taking steps on the changing trends in consumer demand, Taylor suggested that facilitating automated supply chains “co-ordinated for optimisation” ought to be a primary focus.
However, Mohsin Chohan, managing director of Advanced Supply Chain, placed the onus on the looming workforce crisis. “Automation will have its place but will not fix the short-term problem. We have a serious problem with labour [supply post-Brexit],” he said.
Driverless dilemmas
Companies are also considering next steps in relation to driverless technology and electric vehicles, both of which could revolutionise supply chains.
Gareth Osborn, business unit director at SEGRO, said: “We are looking at the technology across the group and preparing ourselves for it, but the big issue is power provision for electric vehicles across the network, and charging points.
“We want to ensure power resources are in the right place to be able to offer something that can answer that demand.”
However, Meech suggested that outside London, autonomous vehicles might not gain as much momentum as the market perceives, since they will increase costs for businesses planning to service their customers from anywhere apart from the capital.
He explained: “One of the problems – [as seen] with some of the wholesale markets that have moved to the edges of London – is it increases congestion and the costs of moving bulky products. It is not the solution it might appear to be.
“Within the North and South Circular, we have got to come up with facilities that will enable the city to work better.”
Other measures that could improve these include the possibility of a rail freight network in London. SEGRO has been in the planning process for an interchange in Hertfordshire for more than a decade.
“It could provide perhaps 8m sq ft around London that is better suited to get product into London,” said Osborn.
The huge spike in warehouse needs that is anticipated as an outcome of Brexit, meanwhile, could also lead to more requirements around airports.
Chohan said there could be a “huge opportunity” to utilise land near airports if the stockpiling situation amplifies.
“Using Heathrow Airport as an example – it has next-to-zero facility to store,” he observed. “If goods are blocked at our ports and have to be air-freighted in to various airports, there will be a huge demand for warehousing space around the Heathrow region.”
Multi-level uses
With residential often winning the battle for land, industrial developers will need to look to smaller sites for feed demand. Could multi-storey sheds be the way forward?
Len Rosso, head of industrial and logistics at Colliers International, certainly thought so: “The way forward, which is encouraging, is multi-storey, the dynamics of which would only work in London at the moment,” he said.
“If occupiers are in central London and there is nothing else they can take, they will take [a space] with goods lifts. It is not ideal, but it is about a lack of opportunity.”
Cameron Fraser, director of Marchmont Investment Management, said he expected that many more deals would be done in cubic feet, rather than rent per sq ft on the ground floor. “Typically mezzanine floor space [is 50% of the rent] – we are now seeing 100%,” he added.
From a light industrial perspective, more residential uses will come to the fore.
Melissa Meyer, associate at We Made That, said occupiers in food and beverage and light manufacturing were particularly well suited to being located below a resi provision, since they can “add to the place-making element”.
Mixed feelings
James Child, retail and industrial analyst at EG, said conversion should be “the new construction”, particularly as the number of available retail units ratchets up.
“Online spending is going up. The retail sector has its own structural problems – 18m sq ft of retail space has been vacated this year,” he said. “Some of these sites could be last-mile delivery or logistics hubs.”
With mixed use, however, comes mixed feelings. “We have done mixed use and it was a mixed experience,” quipped Meech. He said that although Travis Perkins’ St Pancras scheme – its first attempt at the concept – proved it can work,
it could “do better”.
“One of the problems I have with [it], when I look at the draft London Plan as well – it tends to be that it will have pretty things on the ground floor. There is a great focus on retail, but more and more it is [about] wholesale and direct deliveries,” he said.
“Click-and-collect is really popular because the delivery solutions at the moment are not that efficient. As soon as we get deliveries to homes in time slots that actually work, people will want it.”
Going underground
In recent years underground has also been positioned as an alternative place for logistics space, but the practicalities of this has hindered it from becoming a widespread solution.
Tim Cutts, senior regeneration manager at the London Borough of Southwark, said: “Our experience in Southwark is that it is very expensive to go underground and to get large vehicles in that space, but in future that could change.”
The borough has instead opted to look at solutions that repurpose ground-floor levels, and in some cases, carve off parts of sites for residential.
In Southwark, landlords of multi-let industrial estates seem keen on converting sites into mixed use developments going forward. Cutts further noted they all want to deliver “similar typologies” in terms of their spaces, which includes exploring medium- to larger-scale units accommodating logistics and ‘just-in-time’ activities, and covered yards.
Meech observed: “The beauty of doing mixed use is that the residential element can fund the incremental costs of [shifting operations] down or up.”
Repositioning industrials
Industrials as an asset class are also displaying more flexibility, given that the focus on housing in urban locations is clashing with intensifying demand for warehousing.
Charlie Pool, founder and chief executive of on-demand warehouse start-up Stowga, predicted a repositioning of warehousing assets will therefore be a “big trend”.
“We are starting to see some buildings that were not necessarily warehouses are being used – for example, a brewery in East London is now offering industrial space,” he said. “Real estate has to become more fluid as an asset class and more of a service.”
Pool said he also expected to see more tech companies become property companies, rather than the other way round. He pointed to WeWork, which was not originally a property business, as the poster child for this trend.
Stowga itself is also considering the potential to take leases and license spaces to occupiers.
“It is something on my mind right now,” admitted Pool. “There is a clear benefit for the landlord, and for us, we are less likely to be disintermediated – we could sit in the middle in a more comfortable position, and potentially make a better margin.”
Five key trends affecting the sector
Against a backdrop of political turmoil and high street failures, leading figures at EG’s Industrial & Logistics Summit shared their views on what will determine the future of the market.
1. Rising development
This year businesses announced 10.1m sq ft of speculative industrial developments. In the last peak in 2015, there was 8m sq ft. And according to Kevin Mofid, director of commercial research at Savills, there is plenty of land supply. There are currently 192 sites that can accommodate 9,985 acres of development across the country, he said.
Chris Jeffs, investment management director at M&G Real Estate, said the firm was more cautious on speculative developments for this very reason. On the other hand, retention rates in markets where supply is squeezed and tenants find it tough to relocate made for a more “compelling” bet. Jeffs said: “We have seen unbelievable stats on rental growth in London… I think the prospect for that to be sustained, because vacancy levels are so low, [holds] real potential.”
2. Flattening investment
It is broadly expected that 2018 will herald a record year for investment volumes. Mofid noted the purchaser profile was “pretty robust”, comprising of a mix of UK institutions, propcos and overseas capital. He said that of the buildings Savills marketed on a best-case basis this year, equalling £750m of stock, there were four bids per property on average. Meanwhile, yields have compressed to record lows.
However, Jeffs said he expected political turbulence to dampen investment activity. “The tide of inward investment is slowing,” he said. “We have been through an unprecedented five years of attention, from a whole new range of buyers and global capital. Relative to that velocity, it is only natural [to slow down] after six or seven years of outperformance in the market as a whole and above-average rental growth.
“There will be more caution in the market – not least because of the volatile political environment.”
3. Brexit disquiet
David Binks, head of leasing at St Modwen Properties, said Brexit would offer a mix of challenges and opportunities: “The potential disruption to supply chains, the risks to our customers in terms of their business models… these
may have a negative impact for us. But equally, some of our customers have been on the phone to us in the past few months, as the volume of Brexit uncertainty rises, asking if we have space that could accommodate short-term, backstop-type buildings.”
Binks added that players in the consumer goods market at risk of border delays have also approached St Modwen for space in the UK.
However, Richard Moffitt, chief executive of Urban Logistics REIT, noted that some investment decisions had been put on ice, particularly from grocers in the big-box space. “We are seeing evidence now of those decisions being put on hold,” he said. “I am not forecasting a significant downturn in that respect but there is a short-term blip.”
4. Retailer demand
According to Savills, 65% of the UK’s economy is consumer spending, with more than a third directly related to retail; including parcels and logistics companies, this rises to 64%. Since retail continues to gravitate towards online, demand has remained relatively stable. The majority (54%) of retailers expect to require additional warehouse space within the next two years, according to research by Savills and Analytiqa. This compares with 56% in 2017. More than 75% of third-party logistics providers also want to take warehouse space over the next two years.
John Clements, European development director at Verdion, said the fundamentals of the shift from retail to ecommerce will continue for many years.
“The long-term occupier story will still be positive,” he said. Meanwhile Moffitt observed that while the supply and demand relationship was “in pretty good shape”, the more pressing issue was on retaining occupiers that are struggling with increasing overheads.
“We forget at times how difficult it is to attract a new tenant to a new building as distinct from an existing building, or indeed retaining a tenant in an existing building,” he said.
“Labour rates are hugely significant; typically, rent is only 10-15% of an occupier’s overheads, while labour is 35-45%. There are a lot of factors that need to be looked at in more detail.”
5. Narrowing vacancy rates
Until this year, supply has held steady. Savills found that during the past four years, there has been roughly 30m sq ft of available product, with a vacancy rate of 6%. The West Midlands has the highest supply, with nearly 7m sq ft of empty industrial space. But within London and the South East, vacancy rates have dropped to 3.5%, which Mofid said he expected to “get worse before it gets better”, possibly dropping to 1% in London.
However, the figures do not account for any potential retail failures that could boost the vacancy rate. Mofid warned that if the sector reaches a 10% vacancy rate at a nationwide level, it could swing from a landlord’s market to that
of a tenant’s. He said: “If speculative developments increase to 13m sq ft per year while a retailer goes bust and returns a significant amount of space to the market, [and] occupier demand falls – it becomes unbalanced very quickly.”
The experts
- Kevin Mofid, director, commercial research, Savills
- Chris Jeffs, director, investment management, M&G Real Estate
- John Clements, European development director, Verdion
- Richard Moffitt, chief executive, Urban Logistics REIT
- David Binks, head of leasing, St Modwen Properties
- Cameron Fraser, director, Marchmont Investment Management
- Darryl Chen, partner & urban designer, Hawkins\Brown
- Len Rosso, head of industrial & logistics, Colliers International
- Dave Lawrence, partner, CAG Consultants
- Melissa Meyer, associate, We Made That
- Jonathan Best, head of industrial and planning partner, Montagu Evans
- Martin Meech, chief executive, Travis Perkins Group
- Gareth Osborn, business unit director, SEGRO
- Tim Cutts, senior regeneration manager, London Borough of Southwark
- Iain Cox, chair, Business Sprinkler Alliance
- Tom Roche, senior consultant, FM Global
- James Child, retail & industrial analyst, EG
- Philip O’Callaghan, managing director UK & Ireland, Mountpark
- Charlie Pool, founder & chief executive, Stowga
- Ben Taylor, planning director, Barton Willmore
- Ben Nowlan, chief revenue officer , On the dot
- Iain Thomson, associate director, partnerships and communications, Harworth Group
- Mohsin Chohan, managing director, Advanced Supply Chain
- Rory Finnan, head of asset management, Chancerygate
Moderated by
- Paul Burke, partner, Maples Teesdale
- Chen Ikeogu, real estate finance partner, Maples Teesdale
- Samantha McClary, deputy editor, EG
In partnership with
