With the explosive growth in ecommerce during the pandemic creating more demand for warehouse space, there is now a nationwide shortage of availability of warehouses and capacity. Consequently, rent has increased and is unlikely to stop in the foreseeable future. Inevitably, some of the additional costs associated with warehousing and supply chain management are also being passed onto the consumer.
According to research, the cost to rent an industrial property is up by an average of 25% compared to the rates being paid at the end of five-year contracts that expired in 2021. Previously the top rent (depending on location) would be around £4.75 per square foot but is now £7 and likely to keep increasing. In London and the South-East, it can reach as high as £17.50 per square foot.
Most rental contracts still have periodic increases based on a fixed percentage increase plus RPI or CPI. In this real inflationary time that we are in, costs will automatically increase well above increases in previous periods.
Location of warehouses is a key factor in keeping transportation costs down, minimizing delivery times and attracting staff. Cheaper rents are available but will mean compromising on locations that might not be good for motorways or access to labour. But for those who can compromise, they may be able to find a value proposition.
Causes of the Rise in Renting Warehouses
Covid 19 permanently changed customer behaviour in terms of a major shift to online shopping. This led to a record uptake of warehouse space in 2021. Four major retailers, including Debenhams and Topshop moved from multiple stores to online only and many sadly disappeared completely. Covid created its own demand for warehousing. We only need to think of the stockpiling of pharmaceuticals and healthcare products in warehouses around the country to recognise covid’s impact.
Another cause was Brexit as it increased the need to hold higher levels of stock in the UK and in many cases drove additional demand for new warehouse space. Although this prompted many businesses to look at additional warehouses in northern Europe to service continental demand and avoid supply chain disruption, the reduction in UK stocks did not result in a significant reduction in UK demand. Less stock in the UK does not mean no stock in the UK.
Construction costs have increased, and land prices have rocketed. Landlords are forced to charge more. Rising rents are the only way for developers to recoup their rising costs, and, equally, the only way the investors who provide the money to build can get a return.
The basic rule of demand is greater than supply is causing the problem. There are three times the number of enquiries for the space available and this is unlikely to change soon.
How Are Organizations Responding to Rising Warehouse Costs?
Consumers today increasingly demand highly streamlined and highly efficient e-commerce services. Retailers therefore cannot put themselves at risk of stockouts or fail to provide much-valued services like next-day delivery options. Product shortages brought on by the pandemic highlighted the dangers of the just-in-time supply chain, and so reducing inventory levels to save warehousing costs is not an appealing option for most businesses.
A possible way to help with these rising costs is to think in terms of cubic feet, not square feet, and for example installing mezzanine floors. Then the rent can effectively be halved and makes much more effective use of space. Therefore, it is essential to optimize the space by ensuring the warehouse is designed to use the space in the most efficient way and to plan for evolving requirements.
The drive for automation in warehouses reflected a need for more efficiency, especially in ecommerce and was also compounded by labour shortages arising from a perfect storm of brexit emigration, covid healthcare issues and baby boomer generation retirements. Many existing warehouses were not designed for automation and the cost of refurbishment could be prohibitive where it was possible. Higher quality, larger buildings built to the highest environmental standards offered new opportunities for those with the land to build more suitable purpose built and capable of modification to meet exacting automation standards.
Decentralizing warehousing locations is another viable option in some cases, as it reduces transportation costs and enables retailers to be more selective about the kind of inventory they hold in different locations, based on consumer preferences.
Another option is for businesses to outsource their distribution and warehousing services. For more information on this visit https://www.bishamconsulting.com/services/3pl-and-4pl-outsourcing/
The shortage of warehouse space is a major ongoing problem and unlikely to be solved in the short term. Businesses need to be creative and think of new ways of getting around the problem. A recent example was the change of use of a struggling” Mercure Hotel on the A41 to almost 15,000sqm of warehouse space, thus bringing the site into more effective use. Considering the location and design of your warehouse can help to alleviate the rising costs.