Retail at the Forefront as Demand for XXL Warehouses Accelerates
The reshaping of supply chains boosted by rapid growth in online retailing is contributing to a significant increase in demand for XXL warehouses (+50,000 sq m).
A range of factors is driving the remodeling of logistics networks, such as a growth in the number of product lines and order complexity, customer demand for quicker delivery times, and the need for flexibility to cope with demand volatility. These are particularly relevant for supply chains that support growth in online retailing. Occupier demand for larger schemes also reflects a growing realisation that supply chains, when efficiently managed, are a strategic asset that can boost profitability for retailers and others.
These drivers have pushed take-up of XXL warehouses in Europe above 4 million sq m in the 18 months from the beginning of 2012. This represents around 14% of the total industrial market compared with 5-6% in the two years from 2010-11.
In the major European markets, take-up of XXL warehouses rose to over 2.5 million sq m in 2012 and is running at a similar level in the first half of 2013. Take-up had previously been running at 1-1.5 million sq m per year throughout 2010-11. While the UK, France and Germany dominate, XXL warehouses are accounting for a growing proportion of total leasing activity throughout Europe.
Amaury Gariel, Head of EMEA Industrial & Logistics, CBRE, commented:
“We are undoubtedly seeing growth in demand for XXL warehouses arising from supply chain reconfiguration and the consolidation of operations into fewer, larger centralised hubs. These hubs supply a large hinterland area more cost-effectively than might be possible from traditional networks.
“Online retailing remains a significant driver of logistics activity and its future growth will introduce significant challenges and opportunities for networks. This shift will require the development of more specialised platforms that will need to cope with an ever-growing customer demand for more cost-effective delivery options.”
The growth in online retailing – and the associated needs for better process capability, the rising number of permutations for order and fulfilment, and more efficient inventory management – is generating rising occupier demand for larger buildings. As a result, the retail sector – including online retail - accounted for more than two-thirds of take-up in XXL warehouses from 2010-2013. Such large units also allow for better information management, closer links with the customer base and give retailers a unique understanding of consumer buying behavior.
Third party logistics operators (3PLs) also accounted for a significant amount of take-up in XXL warehouses (22%) over this time period. As 3PLs will usually be operating on behalf of one or more contract customers, this figure probably understates the contribution of retailers to overall demand.
The sector is also attracting interest from investors. XXL warehouses have accounted for nearly 20% of the European industrial property investment market since the beginning of 2012, with the UK, France and Germany again to the fore. Investor demand for larger schemes is also growing strongly in Asia Pacific and the Americas where there are strong indications that large pension funds, sovereign wealth funds and other institutional investors regard this type of asset as an opportunity to deploy capital on a scale that would otherwise involve multiple acquisitions.
The scale of activity reflects widespread recognition by investors of the structural shift by supply chain managers and retailers towards larger schemes. It also indicates that the yield premium applied by some investors to reflect liquidity and re-letting risks may narrow over time.