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.