COVID-19 has shown how vital the logistics industry is in keeping our economies and everyday lives moving. Despite having to contend with massive supply chain disruptions in the wake of the pandemic, the sector has shown resilience and ensured the flow of essential goods to key industries, as well as to our homes and stores.
With many physical retail stores closed for an extended period during the height of the crisis and with footfall still reduced, shoppers the world over have been placing their orders online.
This has turbocharged the eCommerce boom, which has been gaining momentum over the past decade. If these changes in consumer buying habits are sustained long-term, this will signify a watershed moment for both the retail and warehouse sectors.
Warehouses for online fulfilment require up to three times as much space as traditional warehouses, due to the diversity of products handled and the need for instant access. This has been driving increased occupier take-up and has encouraged global investors to seek greater exposure to industrial property.
Previously one of the most fragmented sectors in real estate, warehouses today have developed into an institutional asset type, with occupiers requiring increasingly advanced and automated facilities.
Warehouse location decisions are driven by a range of factors, with cost, access to labour and proximity to consumers featuring as some of the highest priorities. Huge demand for space and increasing competition is leading to a lack of available sites in strategic locations. This is driving the emergence of new industrial hotspots, with significant investments in this sector being encouraged at state level.
Strong logistics capabilities have become an important strategic asset for nations and cities competing to play a prominent role in an increasingly interconnected world.
Our warehouse cost index (WCI) explores these dynamic trends. Recognising cost as an increasingly important driver, our global index benchmarks the cost of warehouse construction across 44 global locations. The index has been informed by our experience in delivering facilities for leading international logistics occupiers and developers from a wide range of sectors.
In addition, we have drawn together insight from an online survey, where we asked sector players for their views on the industry trends informing investment decisions and development costs in the current climate.
Our index below is based on an institutional warehouse project in the UK Midlands (equal to 1.00) and benchmarks the cost to build to the same specification across 44 global markets.
In recent years, the logistics market has evolved to become more end-user focused. Enhancing the customer experience is now the ultimate driver of warehousing demand and design.
Retailers understand that it is the quality of the purchase experience that differentiates brands today, with those that can offer a fuller product range and faster delivery speeds holding the competitive advantage. Customers simply want more choice, faster delivery, and cheaper prices.
These rising expectations are fuelling increased capacity requirements and driving new design solutions, with occupiers looking for greater warehouse density, and faster throughput of goods to deliver on their service commitments.
Ultimately, eCommerce success is dependent upon network capacity. The most dominant players gain their advantage by establishing and leveraging an integrated network of both "big box" and smaller, metro focused local delivery stations worldwide.
The sustainability performance of warehouse buildings and our distribution networks as a whole are also rising up the agenda against the backdrop of the global climate emergency. Consumers are using their buying power to make greener choices and many warehouse occupiers and owners have set significant carbon reduction targets.
From solar panels to the increasing use of electric vehicles within delivery fleets, to greenhouses growing vegetables appearing on warehouse rooftops, there are a variety of creative ways for the logistics sector to meet this challenge.
Our research shows that the fierce competition for warehousing space has been driving up costs in the dominant global industrial markets. Warehouses close to major transport nodes with rapid access to nearby high concentrations of consumers are the most strongly in demand.
However, over the past year, Hong Kong has been adversely affected by local political issues and the ongoing trade tensions between the US and China. This has affected the import/export landscape, which, along with heightened commodity prices, has contributed to higher construction costs.
This has led to a cooling in warehouse construction activity over the past 12 months. Economic downturn (91 percent) and geopolitical risk (75 percent) are seen as the two factors which most threaten warehouse construction output over the next 12 months.
With demand close to record levels in many locations, the construction sector needs to respond to this capacity challenge, finding new solutions to increase both the size of facilities and their density.
We have seen a rapid uplift in the square footage of logistics space in recent years, with notable growth in the number of over half a million square foot warehouses. Boeing’s facility in Everett, Washington, USA (which ranks fifth in our global index) is currently the largest warehouse in the world at a massive 4.3m square feet.
Major retailers such as Amazon, Target, Morrisons and Tesco also have facilities making the global top ten in terms of their size (Avanta).
However, land availability is putting constraints on warehouse size in some key markets. Nearly half of our European survey respondents reported that land availability posed a significant threat to warehouse construction output over the next five years.
To achieve the required scale, there is a trend towards building taller warehousing solutions and stacking at height. Multi-storey facilities have been slowly emerging in recent years, mainly close to capital cities such as London and Paris.
They are already commonplace in densely populated Asian hubs like Hong Kong, so it will be interesting to see how prevalent they become in the European markets where occupiers still need to be reassured that they are as operationally effective as single storey facilities.
New technologies are being rapidly adopted across the sector too, as occupiers compete to create highly automated facilities, which can reduce their operating costs and increase their throughput.
In our survey, 87 percent of respondents believe that demand for highly automated warehouses is expected to shoot up over the next five years, with artificial intelligence, advanced robotics and drones identified as the innovations which will have the greatest impact.
Mechanical handling and robotics are widely being deployed to automate the picking of products and we can expect to see greater utilisation of automated guided vehicles (AGVs) to move through warehouses.
All of these advances in technology and automation require a number of adaptations and mitigations which inform warehouse construction to provide the necessary power and sophisticated management software, as well as careful analysis of residual heat, light and environmental impacts.
With the increasing emphasis on providing same-day delivery, urban micro-fulfilment centres are emerging as a strategic battleground between both traditional retailers and eCommerce brands. After highly-automated warehouses, smaller centrally located facilities are the second most popular type of warehouse space amongst 79 percent of our survey respondents.
The demand for faster direct-to-consumer delivery has put a big focus on location decisions and the need for last-mile facilities. Space shortages in urban centres for this type of warehousing are leading to creative solutions, with everything from disused underground car parks to vacant secondary offices being looked to as potential 'pop up' distribution hubs.
As high street retail closures accelerate, redundant shopping malls are often ideally located for re-purposing to logistics space. Retail-to-warehouse conversion is an emerging trend, which is particularly taking hold in the US where 14m square feet of retail space has already been converted, with the likes of Amazon snapping up 'zombie malls' for this purpose (CBRE).
A summary of the results of our online survey of warehouse sector players is highlighted below.
Reducing time on-site and increasing speed to market are key deliverables in the construction of warehousing. Adoption of off-site manufacture techniques is seen as a key means to deliver greater efficiency, with 95 percent of our survey respondents predicting it would have a major impact over the next five years.
The US market has already seen considerable uptake of modular construction methods to improve the efficiency of projects, but other global markets are lagging behind. While an attractive proposition to the sector, it is reliant on the repeatability of designs.
As build-to-suit warehouses have become more prevalent, the high levels of customisation being demanded by occupiers remains a significant barrier to realising the full benefits of off-site.
Keeping pace with occupier requirements is a real challenge within the sector, and the flexibility of new space built is going to be critical. Developers need to look ahead and enhance their base specification in preparedness for future adaptions and automation.
While the pandemic continues to put pressure on the logistics sector in the immediate term, the long-term direction of travel is clear. A definitive 92 percent of those we surveyed expect warehouse construction to rise globally over the next 12 months.
The scale of the investment opportunity is vast but unlocking sites in the right locations is going to be critical. As eCommerce retailers compete to deliver constant improvements in customer service, warehouse construction needs to step up its game in order to keep pace with increasing capacity, automation, build complexity and customisation.
The warehouses of the future are set to break new ground in terms of the state-of-the-art facilities they offer and we look forward to helping deliver this next generation of logistics assets.
To generate the results of our warehouse cost index 2020, we have created a proprietary cost model. Our baseline model, from which the index is formed, is based upon a warehouse project in the UK Midlands (equal to "1" on our index chart).
Approx. cost per sq. ft.: £39.80
Baseline model assumptions and exclusions:
Construction costs only for a typical UK "standard institutional warehouse" of 550,000 sq. ft. unit. No abnormal items.
Heat references – cold/warm/hot – relate the volume of warehouse construction activity in the 44 locations in our index over the past 12 months. The temperature has been allocated based on the professional opinion of our local project/cost managers and has been verified by desk research.
In August 2020, we ran an online survey to gauge the views of warehouse sector players on logistics industry trends. We received a total of 134 responses. Our respondents were based in/responsible for the following regions:
We are confident that our WCI will become a reliable industry benchmark for those involved in warehouse construction. If you’d like to determine an estimated outturn cost for your specific project or to contribute new market information to our index, please get in touch, we’d be delighted to hear from you.