The first quarter of 2024 has come and gone, and there are some signs suggesting that the economic situation in the country is improving, albeit very gradually. This offers retailers and logistics companies at least some hope that things will pick up again business-wise in the not too distant future.
However, there are several questions as to whether the logistics sector will be in a good position to take advantage if consumer confidence does continue to improve.
In the haulage sector, we have already reported on concerns about a capacity crunch developing due to the amount of small and medium sized trucking companies entering administration.
In today’s article, we will nonetheless be taking a look at the country’s warehousing sector, which has its own challenges, including labour shortages, high business rates, capacity constraints, and planning permission problems.
How the picture looks after Q1 2024
Writing in January regarding the year ahead in warehousing, Kevin Mofid, Head of EMEA Logistics Research Commercial Research at Savills, said:
“While many indicators point to an economic soft landing in 2024 we should remember that in reality this rarely happens. However, with almost 26 million sq ft of lease events due in 2024, unsatisfied demand for build-to-suit stock, an occupier focus on ESG, strong levels of requirements and a diminishing development pipeline, we expect rental growth in the UK to average 4.9 per cent in 2024. Overall, there remain reasons to be cheerful but, with one eye on the potential pitfalls ahead.”
Since then, there have been some positive economic developments, with inflation rates falling in the UK falling to 3.2% in March, the lowest since September 2021.
Moreover, according to the Knight Frank Q1 2024 retail warehouse dashboard, Unit vacancy rates for retail park warehouses improved for a 10th quarter in a row, reaching 7.5%. This is well below their pandemic peak of 11.5% in Q2 2021 and the pre-Covid rate of 8.1% from Q4 2019.
On the flip side, consumer confidence, although improving, remains low. The latest figures from the UK GfK Consumer Confidence indicator rose to -19 in April 2024 from -21 in March, improving for the first time in 3 months and beating market expectations of -20.
In terms of retail figures, which naturally influence the warehousing sector greatly, Q1 retail sales were described by Knight Frank as “erratic”. Sales did go up 3.8% year-on-year, with volumes returning to positive growth (+0.2%). However, category performance was mixed with Sports Equipment & Toys (+3.6%) much stronger than bulky goods (Furniture -5.9% / Carpets -1.0%) and Clothing (-0.8%).
Based on these figures, there are signs of improvement, but talk of a thorough economic recovery would appear premature.
Regarding the economic outlook, Cushman and Wakefield’s Q1 2024 UK Logistics and Industrial Outlook said:
“The outlook for growth remains muted, with HM Treasury consensus of independent forecasters, suggesting growth of 0.4% for 2024, albeit with an improved outlook for inflation at 2.1% by the end of the year. The ongoing effort to tackle inflationary pressures is working, but slower than expected and inflation driven by recent hikes in fuel prices is likely to keep price levels higher and for slightly longer. We still believe the interest rate cutting cycle is likely to begin during Q3, but is likely to be gradual and modest until inflation is firmly under control. However, the start of a rate cutting cycle and a change in policy tenor will likely improve consumer confidence and result in an improvement in consumer markets, aiding cash flow for the retail sector and releasing some pent-up demand that has been on hold over the last 18 months.”
Warehousing capacity and planning permission concerns
The 2024 UKWA warehouse market report, published this spring by Savills, shows that in 2021, the warehousing market grew by 22%, a rise of 124m sq ft. It is now just under 690m sq ft.
Despite this growth, in last month’s United Kingdom Warehouse Association (UKWA) newsletter, CEO Clare Bottle stressed that there is still “tremendous growth in demand” for warehousing space.
This is reflected in the figures from Cushman and Wakefield’s Q1 2024 UK Logistics and Industrial Outlook, which states that total available space for units of 50,000 sq ft and above contracted for the first time since Q2 2022, with just 64.8m sq ft of space currently available.
“Of the 64.8m sq ft currently on the market, it is believed that circa 8.65m sq is currently under offer across 52 different units, representing an 11% reduction in the volume of space under offer but no change to the number of units under offer,” the report reads.
Meanwhile, UKKA CEO Claire Bottle has also raised concerns about shortcomings with the UK’s planning system that make it difficult for new facilities to be built. In addition to this, Bottle described business rates in the country as “unfair”.
In the aforementioned newsletter, Bottle added:
“As our recent survey of warehousing real estate showed, there is rising demand for space, but an acute shortage of high quality buildings and potential development land. The Government must not be over-focused on delivering residential housing supply, to the detriment of supporting infrastructure like warehousing that can bring economic and societal benefits, such as local employment.”
The business rates issue referred to by Bottle has also placed extra emphasis on the importance of utilising existing space.
According to a case study published in March by Warehouse Systems Limited, this means exploring options like Mezzanine Floors and heightened shelves:
“The size of your warehouse space has a great influence on value assessments that help determine rate value. Therefore, it’s worthwhile looking at how space utilisation can be improved, considering that you are incurring charges based on its size. Effective space utilisation will help to mitigate the impact of non-negotiable rates by minimising operational costs, avoiding unnecessary costs, increasing the potential for higher revenue, and ultimately improving overall profitability,” says the case study.
In the aforementioned 2024 report, Kevin Mofid of Savills also highlighted the importance of planning permissions, as well as help from policymakers to help install solar panels on warehouse roofs:
“More than ever, the challenge for warehousing will come on two fronts, and policymakers should be mindful of both. Firstly, providing enough land via the planning system for the continued growth of the sector and, secondly, ensuring that policy around existing units facilitates the upgrade of buildings to meet the ESG goals of the future,” said Mofid.
Ageing warehouses and sustainability
The upgrades that Mofid refers to will almost certainly have to be made to ensure that older warehouses in the UK are brought closer to modern standards.
As highlighted in a Maersk report published in March, 82% of warehouses in the UK were built before the turn of the century, while only 5% were constructed in the last 10 years. Maersk adds that many of these facilities do not feature the latest technological advancements or meet modern sustainability standards.
Chief among these upgrades are solar panels, which UKWA CEO Claire Bottle has been advocating for some time. She is hopeful that a new UK Government will be able to provide further support to the sector in order to support businesses with these upgrades:
“We are calling for wholesale reform of Distribution Network Operators (DNOs) and their regulation by Ofgem, and an environment where permission for solar projects is much quicker, fairer and easier to obtain. I was encouraged by the number of MPs and Departmental representatives who attended our Parliamentary Reception, listened to our policy arguments and expressed their support. My hope is for a better informed Government that will recognise, promote and encourage warehousing as an engine of growth for the UK,” said Bottle, in UKWA’s April Newsrack newsletter.
Investment
When it comes to upgrades and the construction of new facilities, investment is obviously key. Unfortunately, like the economy in general, there are some positive signs here but little in the way of “spark” as Knight Frank’s latest Retail Warehouse Dashboard put it:
“The investment market is where the figurative spark is missing most, although Retail Warehousing did outperform the wider retail market as the only sub-sector to see an uptick (+12%) in transactions in Q1, totalling £386m. Institutional demand accounted for approximately 49% of this volume. Stock shortages are expected to further sharpen yields to sub 6.00%, against a backdrop of low voids, anticipated rental growth, and supported by substantial institutional requirements, led by local authority mandates and pension funds.”
Commenting on the state of investment in warehousing in Cushman and Wakefield’s Q1 2024 UK Logistics and Industrial Outlook, Ed Cornwell, the company’s Head of L&I Capital Market, stated:
“A marginal improvement in investment volumes and stability in pricing may signal a turning tide for the sector and point towards an improvement throughout 2024. However, the primary challenge for investors targeting the sector remains an absence of suitable opportunities.”
Automation and labour shortages
The UK is not alone in experiencing labour shortages in its logistics sector, with warehousing staff in particularly short supply.
However, Brexit, combined with a very tight immigration policy that does not allow warehouse staff access to visas via the shortage occupation list, makes recruitment for UK warehousing firms especially difficult.
Last summer, part-time job website IndeedFlex calculated that demand for UK warehouse workers had risen by 43% compared with pre-pandemic levels.
Commenting on the research, Novo Constare, CEO and Co-founder of Indeed Flex, said:
“The logistics industry is not alone in its struggle to fill positions — it’s a problem facing most sectors right now. During the pandemic warehouse staff were classified as essential workers and many turned to the sector to see them through furlough or support them after a job loss. But as life returned to normal and people went back to their previous jobs, warehouses across the country experienced a mass exodus of staff and a lot of companies haven’t recovered since.”
In order to mitigate the harms caused by these shortages, many businesses have looked towards robotics and automation.
According to the Chartered Institute of Logistics and Transport (CILT), automation in warehousing in the UK is being used for various means.
Firstly, it says that robotics and automated guided vehicles (AGVs) are being increasingly utilised for tasks such as picking, packing, and transporting goods. These systems can function continuously, eliminating the need for breaks and reducing dependence on human labour for repetitive tasks.
Additionally, warehouse operators are adopting automated sorting systems capable of managing large volumes of items with minimal human involvement. These systems leverage technologies like conveyor belts, sensors, and computer vision to sort packages and goods efficiently.
There are numerous examples of these trends in the UK already. Retailer John Lewis, for example, is among those using so-called ‘LocusBots’ built by Locus Robotics, which allow warehouse staff to move around sites quickly and pick goods efficiently.
Online supermarket retailer Ocado is another well-known example. The BBC recently reported that the company expects robots to account for 70% of its products within just 2 or 3 years.
Regarding the impact this could have on staffing levels, James Matthews, chief executive of Ocado Technology, told BBC News:
“There will be some sort of curve that tends towards fewer people per building. But it’s not as clear cut as, ‘hey, look, we’re on the verge of just not needing people’. We’re a very long way from that.”
An uncertain road ahead
The variables that will determine the warehousing sector’s ability to meet consumer demand are many, while the extent to which the UK shall rebound also remains unclear.
Naturally, this makes it difficult to state with confidence whether there will be sufficient capacity, labour supply and automation in place to meet increased consumer demand once the UK returns to a period of marked economic growth.
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