The soaring amount of goods bought over the internet is driving up the cost of warehouse and industrial property used by retailers and delivery firms to ship goods from factories to people's homes. A major new report from Colliers International, a NASDAQ-listed property company, estimates that increase demands for new space could require €20bn of new investment over the next four years. It says that Amazon and parcel delivery companies like DHL and Hermes are leading the take-up of new space.
In land-constrained countries like Japan, the solution has been to create 'skyscraper sheds'. One development next to Narita airport by Prologis is seven storeys high. The big driver of this change is e-commerce with more goods bypassing high street shops and being stored out of town in warehouses.
In Britain 15% of retail sales are now online – higher than anywhere else in the world. Warehouses are often not popular with planning authorities and a lack of space near to cities means supply is constrained. Combined with soaring demand, it has pushed up returns to more 20 percent this year, according to Colliers. This means that warehouses will have outperformed offices, shops, equities and bonds during 2015.
'European Retail & Logistics Insights – From Sheds to Shelves' also explains how large distribution centres built for retailers and parcel distribution companies are now heavily automated and increasingly driving a shift to inter-modal connectivity – using road, rail and water to transport goods from A to B.
"The lack of supply has been worsened by the fact that new development ground to a halt during the financial crisis and the subsequent under supply has sent values soaring," said Tim Davis, head of EMEA industrial and logistics for Colliers International.
Companies are also demanding smaller urban logistics sites near to cities to cater for last mile deliveries direct to homes and workplaces. Because this land is in shorter supply, values are being driven up further.
The UK is estimated to need an extra 6-10 million sq m of additional space over the next five years, based on anticipated e-retailing sales growth. Around 200 million sq m could be needed globally over the next five years globally – around 145,000 football pitches. Current vs projected space requirement by 2020 (million sq m)
Demand for Europe alone could attract more than €20bn from investors if e-commerce sales rise to account for 20 percent of all sales by 2020. With respected occupiers, such as Amazon or John Lewis, signing up to 15 or 20-year leases the sector is attracting increasing interest from institutions who favour long-dated income, Colliers said.
One of the solutions to constrained land supply, particularly in Britain, could be multi-storey sheds which are commonplace across Asia. Hong Kong and Japan have dozens of giant facilities which are often highly automated to enable quick turn around of stock.
"Rents are rising fast because companies need more space in better locations to fulfill same day and next deliveries," said Damian Harrington, head of EMEA research at Colliers International. He added, "on top of this, a lack of investment in infrastructure is putting further pressure on delivery costs as companies often struggle with poorly maintained roads and under-invested railways".
The industrial sector has massively outperformed all other types of commercial property along with housing, bonds and equities over the last two years.
"While high street retail landlords have faced crippling vacancy rates and shortening lease lengths, industrial occupancy is at an all-time high. Sheds have continued to outperform commercial property and offer index-linked, fixed-income style returns," explained Tim Davies.
A lack of speculative warehouse development – a hangover from the 2008 recession – has combined with significantly increased demand from the likes of Amazon to cause a supply crunch.
In spite of widespread shop closures over the last seven years, the report shows that warehouse rents are a fraction of retail rents, highlighting just how much could be saved by retailers shifting more stock to warehouses.
"With more sales coming directly from consumers online, a greater proportion of those sales can be fulfilled from cheaper premises. This means a sharper retail footprint, more warehouses and a greater level of consolidation in both supply chain and property assets owned by major retail brands," said Paul Souber, head of EMEA retail agency at Colliers International.
Prime Warehouse Rents as a Percentage of Retail Rent