The warehouse space race: why big sheds have become hot property

The pan­dem­ic-induced growth spurt in UK online sales over the past 18 months has forced etail­ers to expand their oper­a­tions to such an extent that they spent a record £6bn on build­ing new ware­hous­es in the first six months of this year, com­pared with £2.7bn in H1 2020, accord­ing to Knight Frank. 

The estate agency fore­casts that the amount of ware­house space being cre­at­ed in devel­op­ments exceed­ing 4,500m² nation­wide in 2021 will be dou­ble last year’s total of 1.9 mil­lion m². Yet no mat­ter how quick­ly these big sheds are being built, the demand for stor­age facil­i­ties still far exceeds the sup­ply.

“The avail­abil­i­ty of high-qual­i­ty space in par­tic­u­lar has dimin­ished owing to robust lev­els of occu­pi­er take-up over the past 18 months,” reports Charles Binks, part­ner at Knight Frank and head of its logis­tics and indus­tri­al agency. “Our fig­ures show that only 3.9 mil­lion m² is avail­able – and much of that space is either under offer already or not of the right spec­i­fi­ca­tion for poten­tial occu­piers.”

Struggles to meet demand

The indus­try finds itself in this sit­u­a­tion because of two main fac­tors: Covid and Brex­it. At the start of the pan­dem­ic, fears of short­ages prompt­ed many con­sumers to stock­pile house­hold essen­tials. When super­mar­kets intro­duced rules to pre­vent hoard­ing, this put their home-deliv­ery capac­i­ty under mas­sive pres­sure. 

Although the vac­ci­na­tion pro­gramme has since enabled high-street retail­ers to reopen, a sig­nif­i­cant pro­por­tion of con­sumers who start­ed doing their shop­ping online at the start of the cri­sis are stick­ing with the rel­a­tive ease and safe­ty that ecom­merce has offered. This has led to intense com­pe­ti­tion among ecom­merce spe­cial­ists (and clicks-and-mor­tar retail­ers) for prime ware­hous­ing facil­i­ties. 

Research by Sav­ills indi­cates that Ama­zon leased a quar­ter of all avail­able space in the UK in 2020. In August this year, the John Lewis Part­ner­ship signed an 11-year deal to lease a 93,000m² dis­tri­b­u­tion cen­tre in Mil­ton Keynes from Tesco. This will sup­port John Lewis’s move from phys­i­cal retail to ecom­merce – dur­ing the height of the pan­dem­ic, the online channel’s share of the partnership’s total sales jumped from 40% to 60%. 

On top of this, the rein­tro­duc­tion of cus­toms con­trols at the bor­der between the UK and the EU result­ing from Brex­it has inevitably caused delays to imports and exports. This sup­ply-chain dis­rup­tion has increased demand among retail­ers for extra stor­age space as a pre­cau­tion­ary mea­sure. 

Binks notes that a short­age of ade­quate facil­i­ties in the right loca­tions is encour­ag­ing spec­u­la­tive devel­op­ment, in which ware­hous­es are being built before any com­pa­nies have been lined up to occu­py them.

“There is 840,000m² of space cur­rent­ly under con­struc­tion on this basis,” he says. “But, even with this, lack of avail­abil­i­ty is par­tic­u­lar­ly acute in the big-box mar­ket, where occu­piers seek­ing units of 33,000m² or larg­er have very lim­it­ed options.” 

To make mat­ters worse, short­ages of mate­ri­als and/or labour are delay­ing some ware­house con­struc­tion projects, all of which serves to push up costs.

The gen­er­al increase in the val­ue of prop­er­ty in most parts of the coun­try has also been hav­ing an infla­tion­ary effect. Philip Wool­ner, joint man­ag­ing part­ner at Cam­bridge-based estate agency Cheffins, reports that annu­al rents for new indus­tri­al units in sought-after loca­tions around the East of Eng­land are between £110 and £140 per m², while those for ware­hous­es in the very best loca­tions can be even high­er. Only five years ago, the top indus­tri­al rents ranged from £75 to £90 per m². 

Factoring logistics into government-led schemes

“The com­bi­na­tion of strong demand, very short sup­ply and increased build­ing costs have con­tributed to a rental growth rate that shows no signs of abat­ing. With­out a sig­nif­i­cant increase in the amount of indus­tri­al land com­ing for­ward to the mar­ket, the sup­ply of high-qual­i­ty logis­tics space will con­tin­ue to be con­strained,” says Wool­ner, who adds that the prob­lem is being exac­er­bat­ed by plan­ning con­straints, such as the time it typ­i­cal­ly takes to secure per­mis­sion to build an indus­tri­al unit. 

So how can the indus­try get enough space in the right place at pace? 

“Per­haps one way the UK could sur­mount this chal­lenge would be to allo­cate sig­nif­i­cant acreage to indus­tri­al devel­op­ment in some of the larg­er state-led schemes,” Wool­ner says. 

He notes that the gov­ern­ment is form­ing a long-term strate­gic plan to help co-ordi­nate the infra­struc­ture, envi­ron­ment and new devel­op­ments in an area that it calls the Oxford-Cam­bridge Arc, a tract span­ning five coun­ties and cen­tring on Mil­ton Keynes. To this end, it start­ed a pub­lic con­sul­ta­tion this sum­mer. 

For its part, Cheffins is seek­ing inter­est­ed par­ties for a 24,000m² devel­op­ment of mixed-use com­mer­cial space (includ­ing stor­age) in Cam­bridgeshire. It’s hoped that the inclu­sion of space for research and devel­op­ment facil­i­ties in this scheme should attract poten­tial occu­piers inter­est­ed in updat­ing their ware­hous­ing and ful­fil­ment process­es. 

“While logis­tics might not be the most excit­ing part of the com­mer­cial sec­tor, it shouldn’t be over­looked,” Wool­ner says. “It needs to be fac­tored into these gov­ern­ment-led pro­grammes if we’re to feed the demand.”

The inten­si­fy­ing com­pe­ti­tion for prime space will encour­age inno­va­tion in logis­tics, accord­ing to Mike Train­er, real-estate part­ner at law firm Gowl­ing WLG. He believes that etail­ers with the pro­pri­etary tech­nol­o­gy that can host the brand­ed web­sites of oth­er com­pa­nies – and the capac­i­ty to han­dle ful­fil­ment and deliv­ery them­selves – will undoubt­ed­ly have a com­pet­i­tive edge.

“Inno­va­tion is at the heart of the tech­nol­o­gy-led online mar­ket”, Train­er says, “and logis­tics is essen­tial in mak­ing this all work.”