Why Concerns Around Rising I&L Vacancy Are Overblown

In the late 2000s, demand for warehousing largely originated from the main supermarkets, high street retailers and the 3PLs. 

The supply chain networks were relatively simple with national warehouses supplying regional facilities or the shops themselves. Very few people owned a smartphone and therefore limited shopping was performed online. 

Today, the online retailers are leading the charge for warehouse space.  Brits seem to enjoy shopping online with the UK spending the most in the world per capita via computers, smartphones, watches, tablets etc.  The office of National Statistics highlighted that in November 2018, during the three week period of the Black Friday and Cyber Monday promotions some 21.5% of all spending was undertaken online. 

The blended average of online spend throughout last year exceeded 18%.  This trend has been increasing year-on-year, with 2019 approaching 20% overall with the upcoming winter promotions likely to see online spend peaking a few hundred basis points above that.

Consequently, take-up levels for large warehouses over the first nine months of 2019 have been strong at 19.40M sq ft. It is likely that 2016, 2018 and 2019 will be the best three years on record, despite the continued  uncertainty surrounding Brexit,  The logistics market has proved to be robust with supply chains adapting to the evolving drivers of demand, most notably the online retailers. 

In the big box world, namely those warehouses that are in excess of 100,000 sq ft we have seen the number increase significantly over the past few years to support the ongoing demand from online retailers. Some analysts have been commenting in the property press that the current vacancy rate in the UK Big Box market is heading towards 10%. 

That is someway off the mark and unfortunately paints a misleading picture.  The question exists as to whether the extent of stock in the market is fully appreciated. It would appear not. 

If an identity parade was created of investors, developers and agents and they were asked to estimate the current stock level, the answers would be wide ranging with the majority understating stock levels, in some instances to worrying levels. 

At CBRE, we have undergone the behemoth task of tracking every big box warehouse in the UK and can reveal with confidence that big box vacancy levels are currently at 5.6%.  We can highlight that UK stock is currently in excess of 450M sq ft.  If the high estimates of vacancy rates recently highlighted in the property press were to be believed the stock level would be below 300M sq ft.   

Today, there are currently 1,667 warehouses in the UK that meet the ‘big box’ criteria.  The majority are at the smaller end of the scale with 836 units of between 100,000 sq ft and 200,000 sq ft.  At the opposite end there are 26 buildings in excess of 1 million sq ft and a further 170 warehouses larger than 500,000 sq ft. These larger warehouses are frequently referred to as XXL warehouses. 

Between 2012-2015 there was only a single deal for an XXL warehouses where the occupier was an online retailer but  in the subsequent 3.75 years there have been 13 online deals for the largest warehouses with an aggregate floor area of 15.617M sq ft.  In total there have been 55 deals for 100,000 sq ft plus warehouses from online retailers since the beginning of 2016 with an aggregate floor area of 25.427M sq ft.

The key question to the food retailers is how they can create an efficient and profitable model for online sales. 

It is currently unprofitable, but the food retailers persist with the primary goal of capturing market share. Only 5.8% of food is bought online although food retail represents nearly half of all retail spending in the UK.  If the food retailers can crack this nut, the level of overall online spend in the UK will increase significantly. 

An advancement of technology is inevitably going to be the answer, an example being Ocado whose Hive picking technology is leading the way.  If the food retailers manage to succeed in building a profitable online offering, then it is not vacancy levels we should be concerned about but rather an acute demand/supply imbalance of warehouse space not helped by a cumbersome planning process. 

A discussion for another day!

By Jonathan Compton, Head of Industrial and Logistics Strategy, UK, CBRE.

Bigger Not Always Better

Demand for well-located, small light-industrial properties—less than 120,000 sq. ft.—continues to outpace that for larger warehouses, largely driven by local economic activity, urban population growth and same-day delivery expectations of consumers.

Light-industrial properties account for more than half of total U.S. warehouse inventory. The availability rate for those between 70,000 and 120,000 sq. ft. has dropped by nearly 4 percentage points to 7.4% over the past five years. Consequently, their rents have climbed more than 30% to an average of $6.67 per sq. ft. By comparison, warehouses of more than 250,000 sq. ft. had rent growth of 16% over the same period.

New development has been extremely limited, with completions accounting for just 1% of total light-industrial warehouse inventory since 1990. This dearth is attributable to challenges in developing smaller parcels in densely populated areas, including competition with other uses and high land values.

Strong demand for smaller warehouse properties will continue as retailers and logistics operators expand their networks to increase their proximity to consumers. As such, rent growth likely will continue outpacing that of large bulk warehouses.

Industrial Warehouse Availability Rates by Building Size Segment

Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

Industrial Warehouse Rent Growth by Building Size Segment

Note: TW rent index, which is an estimate of net effective rents, not to be confused with average asking net rents.
Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

Construction Pipeline, Small vs. Large Warehouses

Note: Underway and planned as of Q2 2019.
Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

By Matthew Walaszek, Associate Director, Industrial & Logistics Research, CBRE.

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Vietnam’s Value in Supply Chains

The economy of Vietnam has arrived on the global stage.

The drivers are due to a diversity of factors. On one hand, it has benefited from global geopolitical friction and macro shifts. On the other hand, consistent investment in and diversification of its manufacturing capabilities have vaulted Vietnam as a core market within many corporate strategies.

As a result, Vietnam has emerged as a visible and more sustainable component of the global supply chain.

A knock-on effect of manufacturing and supply chain maturity inevitably rises in industrial land prices and warehouse rentals. Vietnam has been no exception. This trajectory shadows a growing trend of multinationals committing to investments, both for manufacturing purposes and for market penetration. Add recent geopolitical tensions to the mix and the commonly held belief that Vietnam is emerging from trade conflicts as a “winner”, one must consider whether the initial drivers will ensure companies remain invested In Vietnam.

Basic economics have dictated the shift of labor out of established markets like China into nearby emerging manufacturing champions, like Vietnam. Between 2016-2019, the hourly wage for manufacturing jobs in Vietnam has consistently hovered at around half of the hourly wage for the same sector in China. (Source: Statista). The surge in foreign direct investment resulting from this mismatch has also led to an increase in the demand for I&L property in three clusters in Vietnam, Hanoi/Haiphong, Central and Greater HCM.

Looking back several decades shows the scale of change in industrial real estate. In 1986, there were just 355 hectares of land in Vietnam for industrial park use. By comparison, in 2018, this base has grown to 80,000 hectares.

The immediate opportunities are clear for international investors concerned with deal size and requisite yields.  Where land costs in core Chinese cities have reached $180 per square meter in Vietnam, industrial sites are already typically ranging between $100-140 per square meter.

Furthermore, the average land rental is increasing 5-8 per cent in Vietnam, according to CBRE Research. By contrast to this more modest price rise, rentals in Vietnam’s industrial parks, especially those in strategic locations connected to and in close proximity to key infrastructure, are surging.

However, the market for industrial and logistics assets in Vietnam remains somewhat nascent. From where we stand, the immediate room for growth is in providing value-added manufacturing and services. As its technical expertise enhances over time, companies are now vying to capture growth in this market and take Vietnam’s industrial and logistics value chain to new heights.

Where to start though? No dialogue about the industrial real estate market in Vietnam is complete without acknowledging the growing automobile industry. Arguably the bedrock of the economy, the automobile sector reflects all that is going well in the local economy. Growing average income levels, coupled with stability in both GDP-growth and inflation, have translated into high demand for automobiles.

This theme has resulted in increased demand for industrial land. While domestic automobile manufacturers and assemblers have faced speedbumps to growth, recent policy changes by the government to enhance standards for manufacturing, car repair and factories have helped Vietnam remain competitive amongst its regional peers, particularly Thailand and Indonesia – in turn spurting the growth in industrial and commercial land leasing deals.

Already, the industrial and logistics segment in Vietnam’s commercial real estate market is being divided into a two-speed market – in Ho Chi Minh City and Hanoi, and the rest of the country. As most occupiers are looking for high quality industrial facilities in prime locations, top tier industrial parks are experiencing approximately 80% occupancy, while facilities in other locations are at roughly 50% occupancy. By virtue of its promising domestic market and development of manufacturing, distribution, exports and imports, this is and will continue to be a market that investors pay close attention to. Leading the influx of capital into Vietnam are Japanese and South Korean companies (think Panasonic, Bridgestone, Samsung, LG), embracing the region’s increasing interconnectedness.

The auspicious place Vietnam has in the region for industrials and logistics will not be cemented without it making significant advancements, though. The dialogue on technological disruption in industrials and logistics, and, arguably, all sectors, will serve as a challenge for a country that has not fully submersed itself in the age of automation.

Currently, many factories and logistics firms still lag global peers in terms of the robotics and labor used. As innovation and technology are weaved deeper into supply chains, and with Industry 4.0 establishing a foothold, it will be worthwhile to upskill the labor pool – perhaps through governmental initiatives, to bolster Vietnam’s ascension in the value chain.

With 97 million people in pursuit of a higher standard of living, Vietnam should not be overlooked merely as an up and coming world factory following in the footsteps of China or a stopgap on the sidelines of geopolitical wrangling. Large conglomerates have eyed the large population as an opportunity to tap into a new market. As Southeast Asia’s rising star embarks on its journey of upgrading its infrastructure and talent pool, what we expect to see is not an exodus of firms in China but an emboldening of the “China +1” model, which is already bearing fruit.

Perhaps the bigger question facing Vietnam’s industrial space is competing with its ASEAN neighbors for global investment. Indonesia, the Philippines and Thailand have all made strides in recent years. Indonesia is currently embarking on a well-publicized infrastructure spend, in line with the new mandate of President Joko Widodo, while Thailand is well established in manufacturing supply chains like the auto sector. 

All in all, plenty of competition will greet Vietnam’s rise as a global player in the industrial supply chain, but initial fundamentals and clear investor interest have ensured that the market is currently on solid footing and will continue to flex its credentials internationally.

By Troy Shortell, Executive Director, A&T Supply Chain Advisory, Asia.