Executive summary

• The success of e-commerce retailers and discount grocers has led to a rapid growth in the construction of Distribution Centres (DCs). These businesses tend to choose to occupy brand new, large units. Further new logistics space is expected to be developed in the coming years, providing significant opportunities for developers that are able to meet this demand and a source of long income streams for investors seeking income.
• The short construction periods and high proportion of development that is pre-let are significant contributing factors to the low rental volatility in the sector. If this model of stock delivery continues, future rental cycles are expected to remain less pronounced than office rents.
• The success of online retailers is at the expense of traditional high street retailers. Owners of older DCs let to these occupiers have an elevated risk of tenant insolvency or CVA. The loss of income from such defaults will have only a small effect on the performance of the total market but as units tend to be single let and relatively large, the effect on a small portfolio will be more significant.
• There is no meaningful difference in the spatial requirements of e-commerce Distribution Centres compared to their traditional high street equivalents in the UK. The overall impact of a switch from high street to internet-based retailing is not per se, therefore, expected to lead to an increase in the total stock of DCs and the long-term trend of rental values on held stock growing in nominal but not real terms is expected to continue.
• Existing units tend to be too small to meet the needs of new e-commerce retailers and too large to meet the reduced need from high street retailers downsizing their operations. Flexibility in design, allowing the occupier to add space, perhaps using temporary mobile facilities, and/or the ability to sub-divide units will maximise the likelihood of tenant retention.
• The demand for next/same-day delivery has raised the importance of proximity to parcel sortation hubs. This favours the Midlands’ so-called ‘Golden Triangle’ and along the M62 corridor, either for smaller businesses or as independent sites for larger operations.
• Increasing penetration of automation and robotics is leading to larger units, with increased eaves heights (c. 15m is the current norm), increased floor loading capacities and higher levels of power (2 to 6 MVA). Planning permission is not guaranteed for very tall units in some regions where labour is scarce.
• Labour shortages are having a significant impact on operating productivities and capacities, especially in DCs clusters. Competition for labour will deter logistics occupiers from locating in areas of very low unemployment whilst placing a premium on (24-hour) public transport services, parking spaces and an attractive working environment.
• The introduction of Ultra-Low Emission Zones (ULEZ) and congestion charging will place a premium on well-located sites on the periphery of large urban areas for consolidation centres. Facilities with multi-level vehicle access would maximise the potential from such sites.

Read the full report here.