Ageing and increasingly expensive UK warehousing a growing headache
UK faces ageing warehouse stock in dire need of investment, while labour and space remain at a premium
With UK logistics property facing a 2% vacancy rate according to real estate firm CBRE, there is already a dire shortage in the sector, but that crunch is highly likely to get worse as competitor firm Knight Frank estimates that as much as 128 million square feet of warehouse space could leave the market by 2027 due to failing to comply with Energy Performance Certificate (EPC) standards.
CBRE estimates that there are only two months of ready-to-occupy space currently available, and Knight Frank says that redundant space that fails to meet EPC standards could increase to 404 million square feet by 2030.
Currently, the energy efficiency threshold for granting new leases is ‘E’ in EPC ratings, which is at the lower end of the energy efficiency scale. However, by early 2025 those properties with lower than a ‘C’ rating will have to pay heavy fines. The requirement will then be raised to a ‘B’ rating by 2030, causing ever more properties to no longer be viable or requiring significant retrofits to bring them up to code.
Eighty-two percent of the UK’s warehouse stock was built prior to 2000, so efforts for properties to meet minimum EPC standards will have to be substantial. A Knight Frank analyst estimated that a mere 6% of properties have undergone upgrades in the past five years, with industrial and logistics real estate being particularly slow to upgrade compared to other sectors.
Demand up, available space down
Meanwhile, the market for space is elevated as UK businesses continue to transition to new forms of consumption and approaches to inventory.
The well-covered growth of e-commerce as a result of the COVID-19 pandemic caused major growth in the need for fulfilment-specific space, which, according to Prologis analysis, “requires three times more logistics space than brick-and-mortar sales”. To cater for increased demand, retailers stocked up on inventory and so required more facilities in an already-space intensive form of logistics. Furthermore, concerns about pre-Brexit trade deals also encouraged retailers to increase inventory levels.
A race for space
The net result has been sharp rises in rental costs. London prime rents rose by 25% in 2021 for properties of more than 50,000 square feet.
Even more intense has been the competition for smaller units. Rents for properties below 20,000 square feet, saw rents increase by 56%. The need for rapid fulfilment and the ability to use automation to drive more productivity from smaller properties has put these types of properties at a special premium.
On top of this, during the pandemic the third-party logistics provider market grew by 67% (2021) with revenues in 2023 expected to be nearly 40% higher than in 2020. However, now 3PLs are finding it hard to acquire the necessary warehousing space, while also facing rising rents and demands for long-term contracts, even as their own contract cycles are much shorter. Property owners are still likely to demand 10-15-year lease terms, while actual tenders are often covering no more than a three-year cycle. This means companies face considerable risk, particularly as their operating margins may be as little as 3%.
Warehousing-as-a-service may offer some relief
On-demand warehousing and storage solutions in the form of Warehousing-as-a-Service (WaaS) is growing consequently and may become an important way to relieve pressure for manufacturers, retailers and logistics providers.
By providing an opportunity to outsource warehousing needs, but avoiding long-term commitments and investments, there is a degree of flexibility and low-to-no upfront investment. Typically, these facilities are newer builds, avoiding the issue of stock that is soon to fall foul of standards, and more likely to incorporate advanced warehouse management systems and automation, but with labour costs built into the contract pricing and the option to shift inventories between locations without long-term charges.
The WaaS market, with its flexible options, is expected to grow from about US$670m in 2023 to US$4bn in 2032.