Friday, December 05, 2014

Confidence returns to the Warehouse Construction market

After years of decline, confidence is starting to return to the warehouse market as developers respond to an improving economy, recovering levels of manufacturing and current high levels of demand for warehouse property.

Improving market sentiment and a pick-up in economic activity has seen total demand for warehousing floor-space across all regions improve with take-up rising by around 28% in 2013.

In 2014, many developers and occupiers active in the logistics and industrial sector remained relatively cautious and, as a result, new construction continues to be driven mainly by build-to-suit activity. In 2014, speculative development rose to around 2.1m sq. ft., but this is still significantly below the peak recorded in 2007 and 2008.

There continues to be good demand for larger distribution, both from retailers and third-party logistics operators due to an acute lack of available space. This trend is likely to continue with the growth of internet shopping as retailers distribute their online sales from retail warehouse space. In addition, as internet sales continue to rise, they are anticipated to lead to a major change in the logistics market, as retailers invest in major warehouse developments purely for internet sales.

In terms of occupiers, retailers continued to drive the warehousing market in 2014, committing to large pre-lets and the importance of the sector is likely to continue in 2015, driven by discount grocery retailers, such as Lidl and Aldi, who continue to acquire more regional distribution centres to support their expansion plans. In addition, the manufacturing sector now accounts for a larger part of the warehousing market than in previous years, with increasing occupier demand now driven by an upturn in manufacturing output and, in particular, growth in the automotive export market.

Developers have reported an increase in the number of occupiers switching from centralised distribution centres to a smaller, regional ‘hub’ model of warehouse. As the major supermarkets continue to improve their e-fulfilment networks and the need for quicker delivery times increases, competition for smaller, urban distribution hubs near cities, particularly in London – continues to grow.

On a regional basis, most areas of the UK have seen an increased level of activity in 2013 and 2014, with the traditional industrial markets in the Midlands and the North remaining the focus of activity. Greater London and the South East experienced rising activity in 2013 but take-up remained below trend levels in these markets due to supply constraints. In addition, the geographical bias of speculative development is weighted towards the Midlands, South East and the East of London, primarily driven by London’s Gateway Logistics Park.

The switch from traditional store retailing to online retailing is likely to cause a significant structural change in the warehouse sector, changing the type of space required. This could lead to a ‘two-tier’ market becoming established, with more smaller distribution centres close to urban markets to fulfil express deliveries, supported by remote and larger distribution centres through which to replenish smaller urban warehouse hubs. This is leading to retailers needing delivery facilities in multiple locations and the warehouse market is expected to see more speculative development of sheds of less than 250,000 sq. ft. in the suburbs, close to good road networks.

“Warehouse construction is expected to have begun a steady recovery in 2014 in response to general economic recovery, an improving manufacturing sector, efforts by retailers to streamline their supply chains and increased demand from logistics businesses serving the e-commerce industry.” said Andrew Hartley, Director of AMA Research. As a result, output is estimated to have grown by around 10% in 2014, with further growth forecast in 2015-2018.”

Beyond 2015 and up to 2018 the warehouse market is expected to grow year on year to reach a value of £1.7bn in 2018, though this is still well below its peak in 2007. The warehouse construction market continues to face a number of challenges including increased competition and, in particular, an acute shortage of industrial land, particularly in locations close to major urban conurbations in some areas and planning delays.

The ‘Warehousing Construction Market Report – UK 2014-2018 Analysis’ report is published by AMA Research, a leading provider of market research and consultancy services within the construction and home improvement markets. The report is available now and can be ordered online at or by calling 01242 235724.

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