Copyright: David Lawson – Property Week Sept 2000Home page
Sheds are sexy. There can’t be many people who thought they would ever see those words in the same sentence but the e-commerce revolution means that big boxes are no longer boring.
‘Delivery of goods poses the biggest challenge to e-commerce,’ says GVA Grimley in a comprehensive research report due for publication later this year. ‘There is a big leap from the ability to provide web sites and back-end distribution.’
Analysts are forecasting a new pattern of development, ranging from giant national distribution centres through a series of tiers down to ‘local fulfilment nodes’ served by an army of whitevan men carrying goods to the doorstep. Each will be linked by high-speed telecom connections buzzing with orders, shipment details and stock analysis.
The jury is still out on whether the total market will swell or shrink. Demand for space has soared in the US with a company like Webvan taking 1m sq ft, says Stuart Morley, head of research at GVA Grimley. On the other hand, Dell switched its sales online and cut its stock turnover period from 56 to six days.
‘On balance, it is estimated that demand will increases. However, it may take some time for the ripple effect from online sales to filter through,’ says the report.
This time lag is a big problem. Shed-shifters are intensely practical folk. It is tempting to shrug and go off to shift a few more sheds rather than worry about what might be on the horizon. It doesn’t help that changes already taking place tend to confuse rather than answer questions such as how locations and building specifications may change.
Food retailers pioneering e-commerce have chosen widely different paths, with Sainsbury and Asda constructing picking centres while Tesco opts to use existing stores rather than create new buildings. Waitrose has just announced it will hedge bets, launching home sales from stores but taking a £35m stake in distributor Last-Mile Solutions in case the market grows too big.
‘No-one really knows how distribution will be affected so the industry is still dabbling,’ says Charlie Binks of Fuller Peiser. He believes buildings will be much the same as today, but they will be used differently, mixing storage and picking. ‘You must have enough goods on site to be sure of satisfying demand immediately. Otherwise people might as well go to the shops,’ he says.
Former NFC group Exel has already moved in this direction. Mothercare realised its stores could not handle a projected fourfold increase in home-shopping sales this year. Excel converted a 40,000 sq ft warehouse in Lutterworth, Leicestershire, to handle the storage, packing and handling systems to cope with 700 orders a day which are also handled by Internet links into the building. They are shipped by Parcelforce overnight.
Access to distributors’ depots is a crucial factor to ensure prompt delivery from national and regional centres. The Midlands is strengthening its locational advantages on sectors like the stationery industry, says Binks.
Hotspots in the US – generally considered to be a couple of years ahead of the UK – include Dallas and Memphis, where UPS and Fedex are based. Airports are also seeing development spurts, and not just because the US is such a large country to service. ‘People seem to forget that the Internet is global,’ says Bob Thompson, e-commerce head at King Sturge. Buyers are not just getting eggs from Sainsbury but products that may be shipped across the world.
Industrial REITs are working closely with dotcoms to find the best locations. AMB, for instance, has provided almost 1m sq ft for Webvan in Atlanta, Seattle and Washington DC, according a study by Deutsche Banc Alex Brown. The grocery firm is spending a billion dollars creating a nationwide warehousing network, adds Grimley. But the cost is still less than the more expensive locations and higher staff counts of supermarkets.
But the most fascinating development is the way developers are evolving into technology and distribution companies. AMB has cross-invested in Webvan and Phatpipe while ProLogis is offering supply-chain packages which integrate software management with bricks and mortar. It is handling the property needs of online bookstore Amazon through development and turnkey building fees.
This partnerships has crossed the Atlantic, with UK subsidiary Kingspark creating two buildings of 228,000 and 500,000 sq ft at Marston Gate, Buckinghamshire. The sheer scale will enable Amazon to increase stocking and shipping capacity more than 12 times. This kind of partnering is proving critical for e-tailers with little distribution experience. It meant the deal could be put together the in less than a month.
But these giants are only the tip of a complex network which has barely begun to evolve, says Joe Valente, research director at DTZ Debenham Tie Leung. He forecasts the creation of five tiers of warehousing:
One factor linking all such centres will be telecommunications, says Thompson. These boxes will no longer be just simple stores but ‘touch-down points’ in a fast-moving supply chain. That involves a constant stream of online instructions, so proximity to high-speed fibre cables will be as import as railways and roads were in the past. That will not mean a wholesale shift in locational preferences, however, as these links tend to run along those same railways and roads.
Warehouses will also still need to have good road/rail links, as they still have to deliver goods. ‘There will be extra sheds on the bypass,’ says Thompson.
Geographical spread of customers will determine locations, says Grimley. This appears to be the rationale behind Sainsbury’s plans, which rely on picking warehouses ‘close to chimneypots’ for the M25 market but are understood to involve store-based deliveries in less densely packed regions. Even this may not be set in stone. Insiders say the Sainsbury Park Royal warehouse is barely ticking over, so the huge cost of development, heavyweight power supplies and 24-hour staffing may not prove the right model.
A hybrid could evolve where firms share warehousing provided by third-party distributors to ensure fast deliveries in markets that do not justify dedicated buildings. P&O is already rolling out multi-user buildings, says Binks. That also solves a problem for investors, who can rely on strong covenants rather than concoct guarantees for untried formats.
Electrons are driving physical goods out of warehouses. Networking companies have discovered that basic sheds and old multi-storey buildings can help ease a near-insatiable demand for data centres which link businesses to the Internet.
Air-conditioning and computer stacks are replacing fork-lift trucks and pallets and promise a sea-change in the investment value and rent levels of sheds in the right locations - near cable trunk lines and business markets. Rents jumped from £11.50 to £14 a sq ft around Heathrow when IX Europe snapped up Airport Gate, a standard warehouse on Bath Road, and freight companies are now being priced out by similar co-location users, according to agents Rogers Chapman.
Chancery Gate and RREEF received a huge bonus when Digiplex took a 60,000 sq ft warehouse in Hayes, west London. They were looking for a modest rent around £8 a sq ft, but it is understood the freehold went for more than £8m after fierce bidding between high-tech companies.
‘These firms are under enormous pressure to meet contracts or carve a first-entry market niche,’ says Roger Saper of Saper Hall, the former JLW partner now carving his own niche in consultancy, who acted for Chancery Gate.
But low-value buildings must meet particular demands before they can transform into data warehouses. Proximity to fibre trunks are a first priority, which is why areas like Hayes, Heathrow and Park Royal are hot spots. Basic construction and loading can be overcome by literally creating a new box inside or beefing up floors. Occupiers spend several millions fitting out these buildings.
But capacity for heavyweight power supplies to drive computers and cooling systems are more critical. Co-location centres require as much as 1kW/sq metre for equipment and more than 10mW overall for a facility of around 100,000 sq ft, according to a report by DTZ Research which picked out warehousing as a focus for this huge new market. That may mean more than dropping in the odd extra sub-station. Delicate negotiations with electricity boards are necessary and some developers are beginning to hit back at enormous premiums being demanded to beef up trunk cabling.
But unless they pay up, west London’s traditional warehousing areas could run out of capacity long before the much-vaunted threat of power cuts because data centres are sucking up so much of the region’s supply.
Warehousing designed specifically for e-commerce is still in gestation while developers consider the potential options. Whitecliff Properties could be a pioneer of this new generation with two speculative buildings on its 3m sq ft Crossways development next to the Bluewater shopping centre in Kent.
This is one of only three commercial ‘e-locations’ designated by BT to develop new business formats, and the only one involving distribution, which makes up around two-thirds of the space.
It was always geared to the information age, as the development partnership of Blue Circle and Lend Lease ran a fibre-optic trunk through the site as early as 1993. This is now fed to individual buildings and sites and the whole site has been upgraded to a business park setting.
Plans for two neighbouring warehouses of 60,000 and 40,000 sq ft were also been tweaked to give an extra 1.78 metres in the eaves heights plus stepped-up power feeds. Whitecliff director Hugo Peel says this offers the extra option for use as automated picking or to insert a mezzanine floor for a call centre.
Site cover and entrances have been adjusted to allow a range from 400 car spaces through 100 vans or the traditional articulated lorry turning circles. ‘The key is flexibility,’ says Peel. No-one yet knows how occupiers will evolve, so developers have to keep options open.
Reaction to the tweaks will decide how the remaining 500,000 sq ft of warehousing on Crossways will be developed. Asking rents are £7.25/sq ft, reflecting the premium location on the M25 while conversions for e-commerce could be capitalised at between £1 and £2/sq ft.