Retailing is changing at a dramatic pace thanks to the rapid adoption of digital technologies and the UK’s insatiable appetite for online retail. The UK is one of the most mature e-commerce markets in the world; in November 2017 online sales accounted for 19.8 per cent of total retail sales.

The growth of e-commerce requires the smooth flow of goods and this is spurring changes to the logistics industry, with 45 per cent of current demand coming from retailers. Convenience is now one of the defining measures of customer service for retailers to be more competitive in the battle for online market share. Those which respond by offering flexible and more immediate pickup and delivery options are likely to win customers, as illustrated by the explosive rise in popularity of the ‘click and collect’ concept.

As a consequence, warehouses are increasingly being developed into distribution centres where goods can be efficiently stored, finished, packed and shipped. Many facilities also increasingly handling customer returns and waste management through reverse logistics.

There is also a major transformation happening within the industry as a result is the implementation of advanced automation systems and robots. Companies such as DHL and Ocado are investing millions of pounds into automation systems that can variously retrieve goods, pick groceries and help pack items into boxes, 24/7, offering productivity gains and reducing costs. Amazon began deploying its robots in the UK in 2016 and opened four new facilities in 2017. Ocado’s deployment of robots using a second-generation system based on a grid structure enables completion of a 50-item order in just a few minutes, compared with around two hours in their first-generation warehouses.

Both the increasingly huge demand from retailers for more warehouses and the requirements for greater space to accommodate automation are contributing to strong growth within the warehouse sector; IBIS World reports annual growth of 11.3 per cent with revenues totalling US$21bn in 2017. Figures released by Savills in November 2017 show that online retailers have dramatically ramped up their presence in the UK in the last decade; in 2008 they accounted for 1.5m sqft of new space, while in 2017 it had soared to 12.2m sqft.

There are a multitude of considerations when deciding on location, size, specification and operation of warehouses. Quality of access to and from the site to reach the main customer base efficiently as well as to receive goods from suppliers by road networks, rail, air and sea are influential to the location. As customers demand ever faster delivery times that are cost-effective, the need to have excellent transport links and be closer to the customer is paramount.

Retailers are increasingly employing a combination of larger regional warehouses or ‘mega sheds’ which support a large network of smaller urban logistics warehouses located closer to their customers so they can provide a ‘last mile’ delivery solution to get items to customers faster as same-day and one-day deliveries become increasingly popular (Amazon offers delivery within one-hour for certain locations). The mega sheds are located some distance away from major cities in response to community concerns about congestion and large lorries, yet are within easy access of most of the UK within a certain time frame.

However, the supply of existing warehouse space has fallen by a massive 71 per cent since 2009, resulting in a significant shortage of suitable space. This is coupled with the limited availability of developable land earmarked for industrial use as it is increasingly needed for residential schemes. A report from Deutsche Bank suggests that underutilised retail parks, business parks, supermarket premises, inner city office space and car parks within city limits could potentially be re-purposed for the storage and distribution of goods to fulfil retailers’ last mile delivery requirements as industrial space becomes increasingly constrained.

Investors who might want to have industrial properties on their books could also “purchase with the intent to convert”, the report suggested, as the sector increasingly becomes a target for institutional money. Despite this, the amount of space being developed speculatively, that is without a tenant already in place, has dropped from a peak of just less than 8m sqft in 2015 to around 3m sqft this year. At this current rate, Savills estimate that there is around two and a half years of supply.

Sources:
http://www.telegraph.co.uk/business/2017/12/25/online-giants-eye-retail-parks-solution-warehouse-crisis/
https://www.ft.com/content/916b93fc-8716-11e7-8bb1-5ba57d47eff7https://www.ibisworld.co.uk/industry-trends/market-research-reports/transportation-storage/warehousing-storage.html
http://www.thisismoney.co.uk/money/investing/article-5025083/INVESTMENT-EXTRA-Fund-managers-cash-warehouse-boom.html http://www.savills.co.uk/blog/article/213252/commercial-property/could-a-shortage-of-warehouse-space…
http://www.propertyweek.com/finance/aberdeen-standard-set-to-raise-250m-for-european-logistics-trust/5093522.article?origin=pwfinanceuk
https://www2.deloitte.com/uk/en/pages/real-estate/articles/shed-of-the-future.html