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Ecommerce growth driving record warehouse development in 2021

The latest research from Knight Frank shows that 40 million sq. ft. of new warehouse space in developments larger than 50,000 sq. ft. is scheduled for completion in 2021. This compares to the 20 million sq. ft. completed last year, as long-term strategic planning of retailers in response to ecommerce growth has led to a rise in development activity. Much of this new space is already committed, with retailers and distribution companies opting to satisfy their requirements through build-to-suit solutions.

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Vacant warehousing remains tight across the UK, with 46 m sq. ft. of space currently available, which represents 10 months’ worth of supply at current take up levels. However, most of that space is in secondhand units that either do not have the right specification or in the right location. Due to robust levels of take up, the level of availability, particularly of high-quality space, has diminished over the course of 2020 and this is driving development.

Ecommerce growth
In 2020 online sales accounted for 27.9% of total retail sales, and with non-essential shops closed ecommerce penetration rates reached a record 36.3% in January 2021. Retailers and distribution firms have responded by rapidly upscaling their operations by expanding delivery services, and this saw warehouse take up exceed 50 million sq. ft. in 2020, compared to 34 million sq. ft. in 2019.

Even as shoppers return to the high street, the internet will play a larger role in the retail market than it did before the pandemic. Retailers need to embrace omni channel retail to remain competitive. Knight Frank analysis shows that every billion pounds of online sales requires approximately 1.36 million sq. ft. of warehouse space. Online sales rose £34 billion YoY in 2020 and is expected to grow a further £41 billion over the next four years and this growth is driving additional requirements for warehouse space.

Charles Binks, Partner and Head of Industrial & Logistics at Knight Frank, said: “The robust forecast for online retail and increased competition for high-specification and well-located assets is driving development activity. Take-up over the past year has reduced the level of availability and Covid-19 has hampered construction, slowing the delivery of new stock to the market. Supply, particularly of high-quality space, has diminished. The level of occupier enquiries remains strong and many of the requirements logged last year have not been met. However, the availability of land or suitable sites remains a key constraint.”

Claire Williams, Research Associate at Knight Frank, said: “High levels of take up in developments larger than 50,000 sq. ft., and the chronic shortage of quality space, is encouraging both build to suit and speculative development. This is because many of the units currently available don’t offer the right space or the right locations to support the growth of online sales and B2C deliveries. There is a need for more urban warehouse space, located close to the customer, in order to replenish stock in the required timeframes.”

Competition for space will continue to drive rental growth over the next five years, as well as longer average lease lengths. The strongest annual rental growth is expected in London (3.2%), followed by the South East (2.7%) and Eastern (2.7%) regions. Returns for UK industrial and logistics over the next five years are expected to average 7% per annum, outpacing those on offer in other real estate sectors.