Multi-story warehouses are commonplace in the most land-constrained markets of Asia – Hong Kong, Singapore and Tokyo – but there have so far been few such buildings in Europe.
When developers in Europe have experimented with the Asian model, they have sometimes met occupier indifference, as in the case of the two-story X2 warehouse near London’s Heathrow, which was finally fully let in 2016, eight years after completion. However, the expansion of e-commerce, dwindling land supply and labor constraints are now leading to the emergence of a specifically European multi-level model, argue James Markby and Kristof Verstraeten, founding partners and joint managing directors of pan-European specialist developer Logistics Capital Partners.
PERE: What are the drivers behind the increased development of multi-level warehouses in Europe?
James Markby: Multi-story is only one element, albeit a significant one, of the trends affecting building design generally. Large e-commerce operations are striving for better efficiency in their supply chains. Meanwhile, as consumers get used to e-commerce, their expectations are changing about the cost and speed of delivery of the goods they buy. Those factors are driving the need to use buildings more intensively to deal with higher volumes faster and more efficiently, and that is leading to changes in warehouse design. Retailers have adopted different strategies to do that, but they all need to make more use of the full area inside the warehouse, including its height, to utilize its maximum cubic capacity.
Kristof Verstraeten: Buildings are getting bigger for two reasons: retailers and logistics operators prefer to centralize or combine inventory in a smaller number of strategic locations; and as a consequence of e-commerce, you also need an increased area inside the building for all your picking and packing and for handling returns. In a typical e-commerce building around half the footprint is linked to processing operations and not to storage. That alone almost doubles the footprint of your building compared to the traditional warehouse of the past where you had forklifts and racks. While buildings are getting bigger, there is also a drive to operate more efficiently by turning stock around faster, which means more trucks and intensive traffic, so you need more yard space outside the building. Those changes are generating issues of land scarcity. There simply isn’t enough feasible land in Europe close to major urban locations to accommodate bigger buildings with bigger yards. One of the ways around that is to make more use of the land by going vertical.
“There simply isn’t enough feasible land in Europe close to major urban locations to accommodate bigger buildings with bigger yards. One of the ways around that is to make more use of the land by going vertical”
Another factor that is playing out in most European markets is labor constraints. Unemployment is decreasing almost everywhere, so availability of labor is becoming an issue for logistics operators. That is giving a push to the use of robotics and automated systems, which was already on the agenda because of cost considerations. Once you are going down the path of considering alternatives to the standard pattern of racking with forklifts that opens the door for multi-level. Automation makes more sense on multiple levels of five meters rather than in a traditional 10-meter high warehouse.
PERE: How is that affecting building design?
KV: These factors all seem to be converging towards the emergence of a new type of building which has lower site density but is higher, often on multiple levels with increased usage of automation. You can go for a higher building with no intermediate floors, so we are starting to see some buildings that are 20 meters high with automated racking systems inside, and we are also seeing buildings that high with two or three levels of seven meters each.
JM: In Europe, we are usually talking about adding more mezzanine floor levels within the existing building envelope, rather than the Asian model of multi-user distribution centers with ramps around the outside and multiple levels of vehicle parking. Typically, the upper floors are automated with robots moving goods around.
KV: They are different solutions to the same problem: how to make use of the height of your building to achieve your storage and processing floor space while having enough ways in and out of the building so that your trucks and vans can load and unload. You either have ramps so that your trucks can drive up to the upper level, or you have a high number of loading docks on the lower levels and then automation and lifts take your goods to and from the upper level.
In the European model, all the trucks typically stay on the ground floor, which is better for the larger European type of trucks. There is a trend in Europe towards larger trucks to save on fuel and carbon dioxide emissions, and that contradicts the use of ramps. Trucks in Japan are typically smaller and shorter, so it is easier to take them up ramps. It is not a clear choice between two different models, though. Even the Japanese buildings with four levels often have two levels accessible with a ramp and the other two accessible with lifts. You will also see variations on the Japanese model in Europe, especially around London and Paris. Those buildings are a little more suited to leasing to multiple tenants, but are actually more evidence of the same trend.
PERE: How should logistics investors respond?
KV: A lot of traditional fund investment decision-making is typically done by looking backward: ‘If I invest in something that has worked well for the last 10 years then for sure it is going to work well over the next 10 years.’ My advice generally to investors is to be more forward looking. Try to examine the new dynamics and extrapolate how the logistics real estate landscape is going to look in 5-10 years. In the last cycle, some investors were deterred from buying smaller low site-coverage cross-dock units for last mile delivery because they thought they were too specialized. But those buildings achieve higher rents and longer lease terms because operators need them to conduct their business. When you understand that, the underlying investment case makes perfect sense, and that is happening now with multi-level buildings.
JM: These big, multi-level warehouses are not short-term contract buildings. They are absolutely fundamental to occupiers’ revenues, growth and distribution network. The long-term investment they need to make in people and equipment makes them unlikely to move, so they will take a longer lease. The challenge for capital markets is not so much the underwriting of these buildings – there is a large and growing body of evidence across most of the main European markets for this trend – it is getting access to the product. Only a small handful of pan-European developers are undertaking these developments and they either have all their capital in place or they are partnered with a sovereign wealth fund. Unless you can team up with a developer that has the technical ability to deliver this product then you can’t actually access it at a meaningful scale because, after construction, these buildings are usually transferred to linked funds and held there for the long term.
This article is sponsored by Logistics Capital Partners. It appeared in the Investing in Logistics supplement, published with the February 2018 issue of PERE