Over the past few months, Covid-19 has taken the world by storm
with one of the sharpest supply-side economic shocks ever witnessed in modern
makers across the globe have responded very aggressively with financial, fiscal
and labour market measures to minimise the pandemic’s risks, which could
structurally damage economies and jeopardise the world’s financial recovery.
UK government, along with the Bank of England, has swiftly acted to sustain the
labour market while providing more liquidity to businesses. These policies have
so far proven to be a lifeline for households and companies alike. However, no
one can precisely predict when things will be able to return to normal. Central
banks, governments and research houses seem to largely agree that demand will
bounce back strongly in 2021. While this would be an ideal scenario, there are
downside risks, which could slow this expected recovery.
Assessing the growth trajectory for warehouse demand
The pandemic has emphasised the importance of logistics as the
backbone of our economy, and occupiers will have to further embrace how
consumer preferences are changing. By the end of May 2020, we had witnessed the
strongest-ever growth in ecommerce sales (May 2020 reached £2.19bn vs £1.38bn
recorded in May 2019) as companies and consumers adapted to coping in this
challenging social and economic environment. According to the Office for
National Statistics (ONS), the last and first time online sales broke the £2bn
barrier was in December 2019. The acceleration of digitisation, mechanisation
and automation will be the next battleground as occupiers review the efficiency
of their supply chains.
The logistics sector has demonstrated itself to be extremely
resilient and agile in adapting to exogenous shocks. However, despite this, the
industry will need to consider the challenges that the manufacturing sector
faces over the next 12 months. Manufacturers are operating in an environment
where global demand has deteriorated and it will take some time for this to
recover to pre-Covid-19 levels. In the short term, these will somewhat prevent
the industrial sector from reaching the record levels of occupational activity
that were expected this year.
The retail sector has been
trying to reinvent itself for the past few years and the Covid-19 pandemic will
be an additional catalyst. Simply put, it is now a survival-of-the-fittest
scenario – occupiers that are not able to adapt will be left behind
We are currently in the midst of a reset period where retailers
are trying to right-size in accordance with their sales volumes per sq ft. The
retail sector has been trying to reinvent itself for the past few years and the
Covid-19 pandemic will be an additional catalyst. Simply put, it is now a
survival-of-the-fittest scenario – occupiers that are not able to adapt will be
In the short term, social distancing measures and consumer
attitudes towards attending crowded places will continue to sustain the demand
for online commerce. Colliers expects this step change in online demand to
accelerate demand for warehouses. Consumers will become more accustomed to the
benefits of buying goods online and occupiers will have to adapt accordingly,
hence reviewing their supply chain models to increase capacity.
Furthermore, difficult times and changes bring innovative
solutions and, for this reason, we believe there will be a further acceleration
in consumer-focused inventions to facilitate this greater consumer appetite for
shopping online. Businesses will have no choice but to embrace the omnichannel
customer experience, ensuring that they have a strong presence online, even if
this means deteriorating profit margins over the short term; it is something
that will have to be done to make their brands more resilient and profitable in
the long run.
The industrial sector will play a vital role in supporting this
change to meet customer expectations. We expect further investment from
retailers to future-proof their businesses as they battle with deteriorating
business conditions and healthy ecommerce demand.
Demand for urban logistics warehouses has increased dramatically
over the past five years and this was taking place right up to the beginning of
the Covid-19 outbreak. The initial shock of the pandemic reduced activity for
smaller distribution warehouses as some occupiers took a pause from their
expansion plans. However, despite this, the market witnessed strong activity
for larger distribution warehouses equal to or greater than 100,000 sq ft in Q2
Nevertheless, we can
expect that demand for units sized between 30,000 sq ft and 150,000 sq ft,
located in proximity to urban town centres, will return as businesses move from
crisis management mode to future planning.
A unit at Central M40,
Banbury: scheme developed by Tritax Symmetry and British Airways Pension Fund
(BAPF). At the same scheme, Colliers recently let a speculatively developed
334,760 sq ft logistics facility to Great Bear Distribution
It is estimated that last-mile logistics costs account for about
half as much of total shipping costs, while fulfilling online orders requires
more than double the space needed to serve the store network. Peak periods are
becoming more unpredictable and therefore occupiers need to find scalable and
flexible solutions throughout their supply chains. Some retailers’ complacency
has left them badly exposed to this shock and it is therefore expected that
over the medium to long term, demand for warehouse space will pick up in 2021.
The magnitude of this increased demand will be dependent on the
speed of the economy’s recovery, but overall the industrial sector has become
less cyclical as occupiers transition more aggressively towards greater
capacity to fulfil online orders.
According to the latest estimates from the Office for National
Statistics, the UK population is projected to rise to 69.4 million over the
decade to mid-2028 and to 72.4 million by mid-2043. It is hard to predict what
the next 20 years of advances in technology will have in store, but it is
plausible to state that these developments will create an even more enticing
omnichannel experience for shoppers.
To serve this extra demand, UK occupiers will need more and
better quality space to keep up with the changes. Some consolidation of
premises will also occur for those occupiers that have been dealing with legacy
issues of their distribution networks as they make their supply chains more
agile and efficient.
Regional and national distribution centres will require greater
space and perhaps more cubic capacity with an increased use of racking, in some
cases, to allow a higher level of mechanisation and automation. Similarly, we
will witness more demand for satellite urban logistics units to decrease
delivery times. Nevertheless, the supply of available warehouses in the UK
remains constrained and the availability of development land has been eroded
significantly over the past few years. The planning system will need to become
more streamlined in the near future to take into consideration the fact that
the provision of warehouse space will become ever more critical in supporting
the average consumer’s busy life.
It is, therefore, the customer who is driving demand in the
sector and as innovations move forward, this demand is set to remain strong.
The key is for developers, agents, landlords, town planners and occupiers to
embrace these changes to ensure the industrial and logistics sector continues
to serve the ever-changing consumer landscape.