A bigger boom in warehousing on the way? Part 2: E-commerce, automation and the long-term outlook
As e-commerce turns from a building wave to a massive tsunami in the wake of COVID-19, warehouses are in high demand, but they will need to adapt to fulfil the new environment. We explore the trends shaping the industry long-term with a host of industry experts
Warehousing has been on a long journey in the last two decades, rising from a necessity few were interested in on an organisational level, to a critical asset that has to run smoothly for an operation to be effective. Amazon shone the way, demonstrating that there was much more that could be done to make distribution centres more efficient and a critical competitive advantage.
Over the last 10 years, I've seen it go from an unloved asset class to the top asset class
“When I first started doing this job approximately 34 years ago, the industrial logistics sector was viewed as a very grubby and dirty and at the end of any asset class,” says Len Rosso, Head of Industrial and Logistics, Colliers. The overwhelming view was “We needed it, but we won't bother about it…. It was viewed as a very sort of unloved asset class. Over the last 10 years, I've seen it go from an unloved asset class to the top asset class.”
This rise has been nitro-boosted by the rise of e-commerce as a critical growth driver for many brands and an area that is increasingly vital to a consumer experience that builds repeat business. As we noted in our feature on e-commerce here, growth is explosive right now as consumers stay away from the high street and look online. Although often driven by necessity currently, this doesn’t mean those behaviours will evaporate and it will all return to the pre-COVID status quo once lockdown is lifted.
A whole new segment of consumers are now versed in buying goods online and those who were already shopping digitally have been lured further in.
Critically, for distribution centres this is creating a race to snap up industrial properties, especially those that are well placed near large consumer bases, as companies try to deal with the greater space that is needed for an e-commerce operation.
However, it is not just about finding the right real estate but making the guts of each one work for the new environment of heightened e-commerce demand and high-speed fulfilment. Maintaining profitability is a huge challenge in this new age and, therefore, warehouses will need to be structured and fitted out for high-end efficiency that befits a new post-pandemic world.
Pivoting away from the high street but towards consumers
“I think really what COVID has done is just accelerated a whole load of a whole load of thinking and challenges that process that were there beforehand,” says Peter Ward, CEO of the UK Warehousing Association (UKWA).
We should expect a significant change and expansion in the future as a result of Coronavirus
“What COVID has done over the last 12 weeks, it's actually created a new set of users, the older generation who we never even factored into our figures,” which “were all predicated on Millennials, Generation Z, and the next generation after that,” notes Ward. “Little did we ever think about people like my mother suddenly becoming an internet user because it's the only way she can get a delivery of groceries.”
The net effect of this is that “We should expect a significant change and expansion in the future as a result of Coronavirus,” say Chris Caton, Senior Vice President, Global Head of Research at Prologis. “I think that'll take years not months to adjust as consumer habits will clearly pivot away from exclusively shopping in store to … kind of a hybrid, where you go to the store periodically but a lot of your consumer staples are bought online.”
Online retail fundamentally requires more warehouse space closer to population centres
“There's going to be this transfer of activity from what we used to call a kind of bricks-and-mortar high street, to where more and more goods are going to be fulfilled in distribution centres and go direct-to-consumers from logistics operations, fulfilment centres, and the like, than through traditional retail channels,” believes Ward.
Kevin Mofid, Head of Industrial Research at Savills, sees the “Online retail piece as without doubt the biggest driver,” but critically “online retail fundamentally requires more warehouse space closer to population centres” to give the customer the right mix of speed and choice. This will drive a major change in dynamic in most markets, from one where much of the final logistics is directed from large out-of-town warehouses and then into cities, to one where resources are more distributed and often smaller facilities closer to urban centres play a major role.
“The core fundamentals of location and connectivity will remain key,” says David Sleath, CEO of property giant Segro. “Sites which are close to urban conurbations, with large employment pools and customer base, and key transport routes will always be in most demand and attract strong competition from developers.”
“There's about three types of real estate strategies,” explains Caton, “one is a centralized distribution centre,” such as the UK’s large midlands warehousing parks, “two would be to have a large DC on the periphery of the city … where the rents and labour are a little less expensive, but you're around an hour's drive or more from the city centre. And then the third would be last mile locations, which are within the markets, and you could even go so far as to talk about urban depots. The trend absolutely is to go towards these last touch facilities that are within the cities…. Last touch and urban are categories where we're seeing more demand.”
We actually have one client who has is moving ahead with taking a look at their entire distribution network, taking previously low foot traffic locations and re-doing them for e-commerce only
“The biggest change,” that fulfilment automation firm GreyOrange has seen recently “is a really heightened interest in hyper-local and micro-fulfilment [centres] and in re-tooling existing retail space to either be 100% e-commerce focused, or moving the back of the store up, so that there's a less space on the front-end for traditional foot traffic and more space on the back end for for-e commerce fulfilment,” notes company CMO Terrie O’Hanlon. “We actually have one client who has is moving ahead with taking a look at their entire distribution network, taking previously low foot traffic locations and re-doing them for e-commerce only.”
Ward thinks this emerging dynamic “Presents a land of opportunity, and a phenomenal growth opportunity,” for the sector. For the UK, even “In a non-COVID world, we were talking about predictions for an expansion of additional warehousing to the tune of 20 million square feet every year for the next 20 years,” and the additional demand as a result of e-ommerce is a further boost on top of that.
Investing in e-commerce operations
The same pressures that are driving distribution centres closer to population centres and into smaller facilities are also behind the drive to make each facility more efficient, which largely means investment into technology and automation.
“Assuming that the economy will bounce back strongly in 2021 and fully recovered in 2022,” says Andrea Ferranti, Senior Analyst, Head of Industrial & Logistics Research at Colliers, the sector will see “more investment in automation, and mechanization to make the operation more resilient, and less, less labour-dependent, more efficient.”
There is a huge opportunity for the 3PL market now to step up and fill that gap
However, the burden of doing this is likely to mean a big boost to Third Party Logistics (3PL) providers, as the expertise and investment will be daunting to many, especially with the number of companies now investigating Direct-to-Consumer (D2C) business models.
“Retailers, notoriously, don't enjoy complexity. And this just gives them another load of complexity to deal with so they're likely to outsource,” believes Ward. “I can't see any supply chain director at the moment or logistics director going to the board of a retailer and saying, ‘I need a massive capex to build an new logistics network around the UK where I can hold stock in multiple locations near to the consumer base’. This is because there's a market out there full of 3PL providers that will do that on a very flexible agile pay-as-you-go basis. So, [there is a] huge opportunity for the 3PL market now to step up and fill that gap and respond to that challenge.”
Automation is continuing to grow rapidly within the logistics facility
For Caton, the catalysing effect of the crisis may finally mean progress in several “Technology trends that I think will remedy the e-commerce profitability” issue that has bedevilled so many in the sector. “On the transportation side, which is obviously the most important, most expensive part of fulfilment,” scaling as a result of e-commerce expansion “is part of the solution as the truck goes from stopping every other block to making three you know, stops per block, but also there's a fair amount of technology aimed at transportation in terms of route optimization.” Then “automation is continuing to grow rapidly within the logistics facility to also streamline cost there,” which will "really lead to a step change higher in profitability for e commerce, as it relates to logistics facilities.”
The long-term outlook
The market for industrial space is the tale of bigger tales being told in the logistics and retail sectors. Already present trends towards high take-up of space for e-commerce operations, demand for facilities closer to urban centres, the decline of physical retail spaces, distribution centre automation and the move to view supply chains as competitive advantages have been thrust fully into the spotlight by coronavirus and will continue after the virus is under control.
A key net effect of this will be elevated long-term demand for space, however “Supply levels were already low,” says Mofid for several markets, such as continental Europe.
What this crisis has done is accelerate online penetration in continental Europe
“The interesting thing about continental Europe is that the online retail penetration rates are much lower,” than in the UK, for example. “What this crisis has done is accelerate online penetration in continental Europe. What that should mean is that the amount of warehouse space needed in continental Europe increases in the same way that it did in the UK five or six years ago. The problem is that when this happened in the UK, back in 2012, we had much more supply of warehouses and in Europe, the vacancy rates are already much lower. So, in many respects, the situation in continental Europe is going to be amplified even further.”
This is going to lead to rates remaining higher than one would expect given the economic shock we have just gone through and for this to continue out into the long-term as demand driven by e-commerce requirements but constrained supply, particularly in those coveted spaces near lucrative markets, creates a floor for prices.
One of the trends that we had, we had clearly observed over the last three or four years was the increased importance of energy availability
This will push the need to drive efficient operations even further up priorities, especially as the economy improves and company balance sheets become less perilous, spurring executives to invest into automation at scale.
“One of the trends that we had, we had clearly observed over the last three or four years was the increased importance of energy availability,” notes Mofid. “The reason for that is that warehouses are being fitted out now much more with robotics, automation and so on, and they have huge energy draws. Not all sites where you would consider building a warehouse and actually have the ability to provide that power…. What that means is actually locations where traditionally you wouldn't choose to locate a warehouse actually and now becoming much more popular, because they have the ability to provide high amounts of energy.”
This need for power underlines the journey warehouses are undergoing. From once unloved assets, to high-tech buildings at the centre of a company’s success, stuffed with sensors and robotics in order to keep up a frantic delivery pace to consumers and hybrid facilities ever closer to the end customer.
You can find part one of our piece on the state and future of warehousing here. Keep up to date with all of our analysis, events and content by signing up to our newsletter here.