In 2019, a highly valued US tech company, until recently run by a flamboyant billionaire founder, halted its hyperactive property-based expansion and sent chills down the spine of parts of the UK commercial real estate sector.
Then there was WeWork, whose so-called blitzscaling accounted for around a tenth of London office market rents in the first eight months of that year. When WeWork WeCrashed, as the Apple TV drama starring Jared Leto as Adam Neumann calls it, raised concerns about office markets where the shared-office provider had quickly become the largest private tenant.
This month, it was Amazon that took the technological shine off the traditionally unglamorous business of warehousing and logistics. After the e-commerce group warned it had over-leased and hired during the pandemic, shares of UK-listed logistics companies such as Segro and Tritax Big Box tumbled and have yet to recover: both are down. about a fifth this month.
You can see why on the face of it. There has been record demand for warehouses in the UK in the last two years, with occupancy of more than 50 million square feet compared to a pre-pandemic average of 32 million square feet. And Amazon, in the last two years, accounted for about a quarter of the market. Like WeWork, its slowdown seemed like a blow to those who were buying or building on the assumption of an ever-expanding American giant. Then add to that the drop in online sales as a percentage of total retail sales, which reached almost 38 per cent in the first months of 2021 lockdown, but has fallen back to 26 per cent.
But it’s hard to imagine that Amazon’s hiatus, with the company planning to grow to its excess capacity, is about to leave the UK swimming in high-quality logistics space. Unlike the offices of 2019, where Brexit had already put a dent in the enthusiasm that was about to be wiped out by Covid, the UK shed market looks solid.
Out of a record first quarter this year, with 13.6 million square feet occupied, Amazon took just 3 percent. Vacant space is at an all-time low, or a rate of 2.8 percent. Savills’ Kevin Mofid reckons that even if Amazon were to vacate a tenth of its stock, which it won’t, that would only move the vacancy rate to about 3.6 percent. That’s compared to an average of 5.8 percent since 2015, and a general rule of thumb that says it takes 12 percent to tip the market in favor of occupants.
Meanwhile, many of the long-term trends pushing companies to take up more modern logistics space remain in place. After the upheavals of the pandemic, e-commerce will continue to grow and many retailers will continue to try to catch up with the acceleration of Covid. The double whammy of Brexit disruption to just-in-time manufacturing, followed by the global gridlock of supply chains in the pandemic, means more desire for space closer to base.
The UK market has insufficient storage per capita compared to other countries. (The US, which starts from a much higher per capita base, is currently building more warehouse space than the entire permanent stock of the UK, Savills says.)
UK planning makes it hard to find new spaces: “There is a substantial lack of supply embedded in the system because local authorities didn’t plan far enough in advance or recognize the change in demand,” says Matthew Griffith, UK policy director. Business West.
All of that translates into healthy rental growth for developers and homeowners. Some large developers do not quote rents or accept offers at the beginning of a speculative build to avoid being underpriced relative to the market once it is completed.
The problem may be less occupancy and more valuation, a problem WeWork, with its $47 billion private market price, also struggled with. Publicly traded logistics stocks had been on the upswing, with investment money trying to get into warehouses this cycle had cut yields by 250 basis points to about 3.5 percent, according to Berenberg. In an environment of rising interest rates, that trend couldn’t last forever, Amazon or otherwise.