The second of a three-part series from our Research & Insight team on the implications of Brexit and the possible outcomes for the core commercial real estate sectors: retail, office and industrial.
By Lisa Graham, EMEA Head of Industrial & Logistics Research & Insight
With no parliamentary approval in sight, the real possibility of a no deal Brexit is propelling a last minute scramble among manufacturers. The main focus is on drawing up contingency plans that may need to be implemented in less than six months. Indeed, as we expressed in our July piece, “Thoughts on a No Deal – an opinion piece”, “the ‘cliff edge’ or doomsday scenario that evokes images of long queues of lorries, stockpiling of goods and grounded planes” could increase demand for warehouse space in the short-term. However, longer term, a no deal Brexit might lead to demand shifting to markets on the continent.
Looking for a Brexit Buffer
Caught in a cloud of Brexit uncertainty are a full range of just-in-time supply chains, from automobile and aerospace manufacturers to food grocers to pharmaceuticals. Frustrated by the lack of clarity, many of these companies like Jaguar Land Rover and Airbus are publicly announcing a plan to stockpile parts to buffer against possible production disruptions should any parts get held up in customs. The UK grocer, Tesco, also announced that they would consider stockpiling in the case of a no deal Brexit. Similarly, to safe guard against any critical shortages, the UK Health Secretary has advised drug companies to ensure that they have an additional six weeks’ supply of medicines on top of their normal stockpiles.
No space to stockpile
A UK 3PL was quoted saying that manufacturers are expected to hold nine days of safety stock that represents a 15%-20% increase in pallets which translates to a 10% plus increase in space requirements. However, overall warehouse vacancy rates in the UK are 6% on average – 4.2% in the East Midlands (UK logistics’ golden triangle) – suggesting the market is undersupplied. Structural trends tied to ecommerce including the growth of online grocery are offsetting any positive or negative Brexit impacts on demand for space. Amazon, who has dominated the demand market since Q2 2015, accounted for an average of 16% of total take up of Class A & B space.
If stockpiling becomes part of the contingency plans for these companies next March, there does not appear to be enough available warehouse space to satisfy demand. Furthermore, since it takes at least six months from planning approval to completion to build a warehouse (adding on more time for temperature controlled space required for storing medications or fresh/frozen foods), there is not enough time to build space for stockpiling. The lack of developable land for logistics use has plagued UK markets for years.
Surplus space could help fill in the gaps
To formulate contingency plans, most companies have begun making inquiries, but very few are committing to space in the absence of a clear Brexit outcome. Evidence that many companies are considering stockpiling as a temporary solution (short to medium term) are the inquiries recorded on Stowga’s online marketplace where businesses looking to store pallets of products can connect to occupiers holding unused warehouse space. In addition to pallet space, additional services such as transport and even efulfilment are available if required. In recent months, the platform has recorded online inquiries from a number of industrial/engineering companies including a Japanese car manufacturer and an airline utility company for space to stockpile parts. In the two weeks following Tesco’s announcement on stockpiling, they and other UK grocers contracted out all of the chilled space available on Stowga’s website. In addition to a Brexit buffer, the rapid growth in UK online grocery is likely to also be fuelling an increase in space requirements. By contrast, there have been no inquiries from pharmaceutical firm looking for MHRA approved temperature controlled space despite being available on Stowga, albeit in short supply.
Whether the need for stockpiling is shorter or longer term, the reality is that in the near term, the UK warehouse market cannot deliver enough space to satisfy demand.