Supply and Demand Trends in the 3PL Market
15 March 2012
Statistics and first impressions can be misleading. With total nationwide availability standing at in excess of 350,000,000 square feet of warehousing accommodation one could be forgiven for thinking that the Third Party Logistics Operators (3PL) are seemingly spoilt for choice when faced with a building acquisition.
Unfortunately, the facts on the ground do not bear this out as all those operating within the 3PL environment know only too well. This is a market with a classic supply and demand imbalance and one which is unlikely to improve in the short to medium term. The determining factors and why the headline statistics are so misleading are explained as follows:-
- Supply: Whilst total supply is healthy, this is heavily distorted by the availability of obsolete accommodation which is generally beyond its useful economic life. Whilst such accommodation can invariably be acquired cheaply, it is typically poorly sited for distribution. Furthermore, it fails to provide 3PLs with the required loading, external yards, lofty eaves height and low office content building, all integral to modern storage and distribution. Indeed, this functional obsolescence is now being recognised by owners who are demolishing such buildings so as to avoid the associated holding costs and in particular empty business rates and security.
- Development: A dominant feature by its absence has been the supply of new distribution buildings built by developers. Indeed, within the last 3 years, there has been virtually no new distribution accommodation built within the UK. During the sabbatical, developers and their agents have been focused on securing occupiers for the surplus of new units constructed between 2006 and 2007 on a speculative basis. This boom period was driven by a number of factors, including cheap and ready access to capital, cheap building costs, weight of investment money and above all a strong underlying economic confidence. With the onset of the economic downturn in 2008 these factors have given way to a new reality and one beset with uncertainty and nervousness within the market. This new reality has potentially severe implications for all 3PL operators which are now been acutely felt within the market place.
- Demand: In a market place saturated with old and inefficient stock, 3PL demand has focused on the residual new and good quality second hand accommodation which meets modern 3PL requirements. In contrast with the old and inefficient stock, this accommodation provides the 3PL with the operational platform it requires in terms of configuration and all of which are conveniently located close to trunk roads and the national motorway network. Historically, 3PLs have had a choice of buildings and made the most of their strong negotiating position. This has been reflected in heavily discounted rents, extended rent free periods and capital contributions towards fit-out. With supply of existing stock dwindling and not being added to by developers, this environment is rapidly changing. Consequently, 3PLs are being forced into direct competition with each other over what modern stock remains. This reflects a significant change in the balance of negotiating power which has now swung back to the landlord and which is being reflected in more penal lease terms and significantly reduced rental incentives.
- The Future: The weight of current take up by 3PLs combined with the absence of speculative development can only lead to more 3PLs being forced to consider design and build (build to suit) solutions. Whilst this solution will suit some operators, it does not provide a universal solution given that it requires a much longer lease term commitment of up to 15 years to make it viable. This does not sit well with the typical 3PL contract which is between 3-5 years. We believe that this may lead to a change in the way in which developers and 3PLs alike consider the design and build solution. Both parties will have to be more flexible and accept buildings which are less bespoke and reflect a more flexible design and specification and one which will continue to be attractive to the market in the event of the 3PL not renewing its lease. If this strategy is to be successful, it will require buildings to be sited in established prime distribution locations with universal appeal.
- Conclusion: The 3PL market has changed. Tenants need to adapt their approach to property to remain ahead of the curve. Specifically:
- 3PL’s need to try and plan ahead and anticipate their likely future requirements.
- All 3PL tenants should be proactively right sizing, not only for their existing space requirements, but also looking at future proofing as far as they are able. If they don’t they might find that the cupboard is bare next time they look in the market.
- Occupiers need to be aware of what the competition is doing; buildings they might vacate to present off-market opportunities to acquire, these will often be fully fitted out, saving capital expenditure.
- Property and business development service providers should be working even more tightly than before.
- When the search is done and a preferred property solution identified, first class negotiators should be appointed to counter the swing back to the landlord.
The Industrial and Logistics team at NAI Haywards are very experienced in all aspects of the 3PL process and are well known nationwide as key players in the 3PL market. Unlike most Practices, we act exclusively for Tenant occupiers and are unaffected by the conflicts of interest which affect many of our competitors who act for Landlords and Tenants alike. Freed from any such constraints, we are in a perfect position to apply our extensive market knowledge and know how in delivering the best possible 3PL property solution in what is an ever shrinking market. For more information on how we can assist you and your Company with its next acquisition project please contact George Laird or Martin Loveridge who will be pleased to discuss what we can do to help and how we do it.
NAI Haywards is a leading commercial property and workplace advisor representing the needs of occupiers throughout the UK and across Europe. We deliver our clients sustained business profitability and flexibility by increasing the contribution made by their property and workplace environments.
If you would like to know more please do not hesitate to call George or Martin 020 7101 0200
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