Warehouse-as-a-Service is a lifeline for UK 3PLs, retailers, and manufacturers

The UK is facing a warehouse space shortage of unprecedented proportions, with significant ramifications for businesses, supply chains, and the broader economy.

The vacancy rate for logistics properties in the UK has been stuck below 2% for the last five years, according to CBRE. The company estimates that only two months of ready-to-occupy space is available and expects shortages to continue indefinitely.

The warehouse crisis is a perfect storm of regulatory pressure, lack of supply in suitable available stock, markets in transition, and an unforeseen global health crisis.

Regulations are contributing to dwindling supplies. Real estate consultancy Knight Frank estimates that a staggering 128 million ft² of warehouse space is at risk of going off the market by 2027 and 404 million ft² by 2030 for failure to comply with Energy Performance Certificate (EPC) standards. EPC is a rating used to assess the energy performance of residential and commercial buildings, ranging from G (inefficient) to A (very efficient). The current threshold for granting new leases is E, but beginning in 2025, properties with lower than a C rating will incur significant fines and cause many to become unavailable. The requirement will be raised to a B rating in 2030.

Because 82% of the UK’s warehouse stock was built before 2000, many properties will only meet minimum EPC standards with significant renovations. However, just 6% of facilities have undergone upgrades in the past five years, and investment in industrial and logistics real estate has lagged behind other sectors and the UK average for several years, according to CBRE.

E-commerce accelerator

The rapid growth of e-commerce, accelerated by recent global events, is also a significant contributor to the space crisis. Online transactions made up 26.5% of overall retail sales in 2022, more than double the previous decade. UK internet retail sales grew by 47% in 2020 alone.

In their efforts to meet the overnight delivery expectations set by giants like Amazon, e-retailers have stocked up on inventory, driving an insatiable demand for storage space that has eased only slightly as the pandemic has receded.

Brexit-related uncertainties have also prompted businesses to stockpile goods, further straining available capacity. Many companies have scaled back on “just-in-time” inventory management in favour of more resilient strategies that require more warehouse space.

As if all this wasn’t enough, warehouse rental costs have soared. Prime rents in London for properties of over 50,000 ft² rose 25% in 2021, with smaller, sub-20,000 ft² units jumping a staggering 56%. Rent costs are expected to moderate in coming years but on a much higher base.

The warehousing labour market is also under immense pressure. The average warehouse operative salary rose by 6.8% in 2022 year-on-year compared to a decline of 6.4% for all jobs, according to Adzuna. Warehouse work was the top trending job among UK jobseekers in August, followed by lorry drivers, who also play a critical role in supply chains. Job vacancies for warehouse workers are exceptionally high in the Midlands, with the South East, East, and South West also experiencing significant shortages.

The economic impact of the shortages is tangible on businesses’ capacity to expand and innovate, hindering overall economic growth. Competition for available facilities aggravates the cost spiral, with the burden falling especially hard on margin-challenged smaller businesses and retailers.

3PLs take a hit

Third-party logistics providers (3PLs) have also taken a hit. Retailers turned to them for delivery expertise during the pandemic, driving 67% growth in the market during 2021. While that year was an anomaly, 3PL revenues in 2023 are expected to be nearly 40% higher than in 2020.

Although the growth is good news, 3PLs seeking warehouse space are encountering tight supply, rising rents, and demands for long-term contracts. In a volatile market where most can’t reliably forecast more than three to five years out and tenders seldomly offer more than three year cycles, property owners still demand 10- to 15-year lease terms. This creates enormous risk for organisations that operate on margins of as little as 3%. Even those who commit to long-term leases face buildout delays that can last a year or longer.

In short, a 3PL market demanding flexibility and agility is battling chronic shortages, rising costs, and unrealistic leasing terms.

The WaaS lifeline

Relief may come in the form of warehousing-as-a-service (WaaS). This new logistics business model offers on-demand warehousing and storage solutions to manufacturers, retailers, and logistics providers, allowing them to outsource their warehousing needs without the long-term commitments and investments associated with traditional warehousing.

WaaS involves no upfront investment and offers flexible and short-term contracts. Capacity is scalable, and customers can shift inventories between multiple locations without incurring long-term charges. Labour costs are absorbed into contract pricing, and facilities are fully equipped with advanced warehouse management systems, fire and water damage protection, and state-of-the-art security. This offers flexible bespoke solutions that revolve around customers’ needs.

The WaaS market is expected to grow more than 22% annually from about US$670 million in 2023 to $4 billion in 2032. Demand is fuelled by the e-commerce boom and the need for logistics providers to gain the flexibility to respond to seasonal changes in demand and the entrance of new online retail clients.

Iron Mountain Warehousing & Logistics’ flexible, state-of-the-art facilities are strategically located throughout the UK and can be used in as little as one day. With a capacity of over 400,000 pallets across VNA, narrow, and wide aisles, and a strong presence in the Golden Triangle, Iron Mountain provides 3PLs and others with a fast, convenient solution that doesn’t require long-term contracts or capacity guarantees. Space is fully fitted and ready to use with advanced warehouse management and chain of custody services. Iron Mountain also provides specialised transportation solutions.

The UK’s warehouse space shortage is a complex challenge with far-reaching consequences. WaaS may be a 3PL’s best friend during these uncertain times.

To find out more about Iron Mountain, please visit www.ironmountain.com/uk/services/warehousing-and-logistics

Source: logisticsmanager.com