ANALYSIS: A tale of big and little sheds

The growth of ecommerce is creating new demands for logistics facilities at both the big and small end of the market.

Amazon has without a doubt become the poster boy for ecommerce in Europe. In that role, it has also ushered in the development of mega sheds in the European logistics market. While 40,000 m2 was traditionally a large size for a distribution facility, the US ecommerce giant was seeking a facility of 123,000 m2 when it teamed up with Australian logistics specialist Goodman to build its first European shed in Leipzig in Germany in 2006. Initially the large size of Amazon’s new distribution facilities in Europe sparked incredulity and scepticism but the function of such buildings is becoming more recognised and accepted, according to Philipe van der Beken, managing director of Goodman’s continental European operations.

‘Amazon was a pioneer and the size of its first facility made it a big risk. At the time the size of their facilities and their chosen location were novel, and they had a hard time having a dialogue with other players. Now the average size of many retail and e-commerce buildings is increasing.’

In total Goodman has now delivered 1 million m2 of space for Amazon in Europe following the completion of a new facility in Wroclaw, Poland last year. Indeed, the mammoth sheds that Goodman has developed for the ecommerce giant has helped earn the Australian company the title of the leading logistics developer in Europe for the fourth year running, according to PropertyEU’s latest ranking.

Amazon’s very large sheds of 100,000 m2 or more may be twice as big as the norm, but facilities of between 20,000 and 50,000 m2 have in recent years become more common, noted Andy Gulliford, chief operating officer of UK REIT Segro. A growing number of occupiers are consolidating their operations and moving away from multiple, smaller and obsolete facilities to larger, more efficient facilities. In Milton Keynes in the UK retailer John Lewis has a facility comprising a total of 2 million square feet, or 900,000 square feet (roughly 90,000 m2) for each centre, Gulliford pointed out: ‘That’s the way it’s going. Large XXL sheds and mega campuses have become the order of the day.’

At the same time, with online retailing leading to a configuration of supply chains, demand is growing for last-mile delivery centres at the smaller end of the market, he added. ‘A major feature of the current logistics market is that it is becoming more polarised. Logistics sheds are getting both bigger and smaller.’

The industry is also becoming more complex, Goodman’s Van der Beken said. ‘Supply chains today are very dynamic, driven by changing demographic and consumption landscapes as well as legislation. Customers are keen to increase the versatility of their network. Whether they are service providers or not, we see that many of our customers are seeking different formats, cross-dock facilities, fulfilment centres, hub and spoke buildings that reflect complex supply chain needs, designed to make delivery more efficient.’

Higher requirements
In addition to ecommerce, the outsourcing business and 3PL (third-party logistics) are also helping reshape the logistics business, Goodman’s Van der Beken noted. ‘3PL as a whole is showing 2.5% growth across Europe, which is double the continent’s GDP growth forecast, he added. ‘That remains a key theme alongside consolidation, globalisation and moving up the value chain. We are benefiting from that. These trends bring about more changes and a higher level of requirements and specifications to obtain higher levels of efficiency. These are key drivers on the development front.’

In a muted economic growth environment, efficiency optimisation and cost cutting is gaining importance, Van der Beken said. ‘Across the globe, companies are looking for efficiencies and are reducing networks or removing overlaps in terms of delivery.’

Goodman’s German customer WMF is a case in point, he said. The home and hotel furnishings company is consolidating 33 of its locations into two distribution hubs at Bergkamen near Dusseldorf, which will be operated by DB Schenker, and Ulm near Dortmund, which WMF will manage in-house under a unified IT system. ‘We see this trend elsewhere in the world. There is pressure on margins and thus pressure to make the whole delivery chain more efficient.’

On-time delivery is essential for all customers, but it is often even more critical for ecommerce players who need to be up and running for the crucial Christmas sales period, Van der Beken said. ‘Consider a 100,00 m²-plus fulfilment centre, and the ramp-up that is required in terms of fit-out and hiring thousands of staff. These processes will at least in part run parallel with the building construction. Delivering the building late is therefore not an option.’

Shorter construction times
In some sectors, failure to deliver on time can result in lost business, according to Ian Worboys, CEO of Prague-based developer P3. ‘Depending on what their business is, down time can have a huge impact. A customer may pay €5 or €10 mln for a warehouse but in a multibillion dollar business failure to deliver on time could cost them billions.’

As the pressure for timely delivery mounts, P3 has embarked on a search for new building techniques in an effort to shorten construction times. The Prague-based company sought expertise from outside the sector and brought together specialists from industries spanning car manufacturing and aeroplane engineering to pool know-how and optimise construction processes, Worboys told PropertyEU. ‘All these experts had experience with just-in-time construction in different industries, for example for Formula 1 racing cars. Together with our own team this led to a discussion about how many fixed components there are in a warehouse and how we can develop a fast track for construction.’

A key recommendation that emerged from the discussion was the need to focus more attention on the pre-planning stage and to mechanise procedures where possible. Another centred on reducing the number of different components and enlarging the size of panels used in a facility, Terry Chung, group construction and development director, said. The P3 team subsequently embarked on discussions with its existing (and potential?) suppliers to enlist their support in turning these ideas into practice. ‘Our suppliers are also becoming more and more efficient and using more sophisticated processes and higher quality materials. As a result, we were able to scale up supplies and negotiate new contracts. You can get a better deal if you have greater buying power.’

Timely delivery is an important consideration, but not the only one, Worboys noted. ‘There’s a cost implication for fast construction, normally customers would pay a 5% premium if we build a facility really fast. And our customers and tenants don’t always need to receive a facility in the shortest possible time. (On the whole) our customers are (more?) interested in reducing their operating costs during the lifecycle of their operation. On that front a saving of 10% can really make a difference. It’s about finding the right balance.’

In that context, energy consumption is a key area where savings can be generated, Worboys said. ‘Energy prices are cheaper now, but the question is for how long?’

One way of reducing energy costs is by using ‘smarter’ components, Worboys said. ‘By using thicker insulation you can reduce the amount of heat lost. We use LED lighting where we can fit it which generates a very simple payback. Low-flush toilets already help to reduce water usage on a household scale, imagine using it on an industrial scale. The savings are even greater.’
Ultimately, the time frame to build a new logistics facility depends on the complexity and size of the structure, according to Philip Dunne, CEO and president of Prologis Europe. ‘Ultimately the speed with which a facility can be built is predicated on the land. Building time is shrinking somewhat, but that only works if you’ve got the land in the right place, and few players control the land. In any case, I don’t think speed is as critical (to the success of a facility) as the technical specifications and the sustainability (of the structure).

Sweet spot
While big and XXL sheds have become more commonplace across the industry as ecommerce leaves a lasting mark, for Segro the real sweet spot is at the smaller end of the market, Gulliford said. Demand is growing for last-mile delivery centres at a time that a growing number of industrial sites are being displaced. ‘For example, in London former industrial sites are being regenerated by new multifunctional projects such as Nine One Elms and Old Oak Common. A similar trend is visible on the continent, primarily in Germany, he said. ‘Many local authorities and municipalities in cities such as Munich and Stuttgart are not interested in expanding their logistics and light industrial locations.’

Segro is well-placed in both the UK and mainland Europe to take advantage of the growing demand for delivery centres, Gulliford said. ‘Thanks to our existing estates we already have planning consent for facilities on the smaller end of the spectrum. That is a huge competitive advantage.’
Moreover, supply is tight, he added. ‘That’s a real issue for occupiers. In some markets we’re seeing vacancy rates well below 10% and there are lots of markets where a 5% vacancy rate is structural. When you get to single-digit vacancy rates, you know there’s not much quality supply around. In the crisis there was more supply but occupiers now need to be more savvy about procurement of their space.’