Collateral damage…

20 May 2024

Could the development of last mile, small and midbox warehousing become collateral damage at the ballot box? Liza Helps reports.

Clare Bottle, CEO, UKWA

A ‘PRESUMPTION in favour’ of residential development on brownfield land sounds perfectly reasonable on the face of it and with a government, opposition and press obsessed with a lack of housing in the UK – a sure fire vote winner in the eventual General Election.

But this seemingly innocuous tinkering to national planning policy by the Secretary of State for the Department of Levelling Up, Housing and Communities in February this year could adversely affect the development of last mile, small and mid box logistics and industrial development across the board to the detriment of the economy as a whole.

Colliers head of industrial and logistics research Andrea Ferranti explains: “If this policy becomes a reality it will be challenging for the sector for last mile, particularly in key town and cities.”

Already conurbations such as Greater Manchester and the West Midlands have seen a nearly a fifth of their industrial land lost to alternative uses - mostly residential – in the two decades between 2000/01 and 2020/21.

London has been most affected losing nearly a quarter of its industrial land in the same period - with 40% losses in inner London.

In fact, the issue was so acute in the Capital that a Centre for London commissioned report published in 2022 and carried out by the Industrial Land Commission found industrial space loss was stifling economic growth and putting the Capital at risk of not being able to function. This was why strategic industrial sites were ringfenced in the London Plan – the very same plan that Michael Gove, Secretary of State for Department of Levelling Up, Housing and Communities wants reviewing in order to free up 1,800 acres for housing development.

Looking specifically at the issue in London, British Property Federation Assistant Policy Director, Planning and Development Sam Bensted, says: “While the need to tackle London’s housing crisis is irrefutable, the idea that we can relocate employment uses outside of the M25 to free up land for new homes fundamentally misunderstands how our cities work and the need to create housing and jobs side-by-side.”

Unlike smaller cities in the UK, London’s size means that industrial accommodation for critical activities – such as waste removal, delivery depots and repair and maintenance activities – must be available in or near the city centre rather than just at the city fringe. Losing the space would also mean the loss of jobs in the Capital which are worth more than £78 billion to the city’s economy.

Obviously the Capital is a special case due to it’s sheer size, but the fundamentals are true of all major towns, cities, and conurbations in the UK especially when it comes to the rise in online retail and the subsequent need for last mile warehousing in central locations compounding the pressure for industrial development on brownfield sites [see box].

UKWA CEO Clare Bottle explains : “If last mile space is not properly planned for, then there is a high risk that the supply-chains will be forced to operate via sub-optimal locations, which drives in more transport cost and a higher carbon footprint.”

SEGRO’s head of London, Bonnie Minshull agrees: “From an operational point of view, being close to your market reduces stem mileages, reduces transport costs, meaning less perceived traffic on the streets, and the modes of transport used can be more environmentally friendly - cargo bike, all electric vans etc.” 

Logistics UK head of Head of Cities and Infrastructure Policy Jonathan Walker says: “While housebuilding is vital, communities also need logistics, meaning our sector needs space on brownfield land too.” 

It is a cry across the board from planners to developer to the logistics sector itself. Developer investor St Modwen’s head of planning Richard Hickman adds: “Of course housing is important, but it cannot be seen in isolation, it needs all the supporting facilities and infrastructure to make a community function successfully, and that includes logistics.”

The Royal Town Planning institute concurs - housing, and jobs need to be developed side-by-side. RTPI Chief executive Victoria Hills, said: “It is crucial that new developments are well-planned and of high quality, and that they do not displace important commercial and industrial uses that play an important role in supporting sustainable mixed-use places including local economies.”

SEGRO head of London, Bonnie Minshull

Minshull notes: “You cannot have homes without jobs and you cannot have them without the space to service them.”

One of the issues with prioritising residential development on brownfield land is that Local Authorities could use it as an excuse not to push forward industrial and logistics believing – wrongly – that office based employment is the answer. Potter Space manging director Jason Rockett says: “For a lot of Local Authorities when it comes to employment they think its offices, they don’t understand what is happening inside a modern industrial buildings, the number and range of skilled jobs on offer – its not just all picking and stuffing especially in the small to midbox sector.”

It's not just the Local Authorities that seem to underestimate the logistics sector its politicians and policy makers as well. Hickman notes that within the national Planning Policy Guidance there are reams of pages regarding residential development and how to calculate it going forward but that the logistics sector barely gets paragraph.

“At a national level logistic and employment are not even the poor relation [in terms of political/policy acknowledgment] they are the impoverished relation,” he says. 

Rockett adds: “We need to do more flag waving for industrial and logistics sector. We need to get planners and policy makers to actually see what is happening inside the box not just looking at it from the outside.

“We need this to come from the top and we need more joined up thinking from government and the councils using the likes of the UKWA and the British Property Federation. Whoever is in government next they need to be brave from the top down.”

With news from the ONS that transportation and storage [logistics] was the largest positive contributor to the higher than expected GDP growth of 0.6% in the first three months of the year – leading the UK out of recession – by growing 3.7% in Q1 2024, it would be foolish to ignore the contribution it makes to the economy as a whole.

According to industry body Logistics UK the sector contributes £163 billion to the UK economy and employs 12% of the workforce directly or in logistics roles within other companies.

Despite the figures showing that the sector is leading the charge in terms of GDP, there is a noticeable slow down in logistics businesses taking new space and expanding - this has more to do with the current economic conditions with high interest rates preventing developers and investors from building rather than a retrenchment in the logistics sector itself.

Savills head of research Kevin Mofid

Savills head of research Kevin Mofid explains: “The key to reiterate to policy maker and politicians is that markets ebb and flow and those making policy need to take a long term view; populations are rising, urbanisation is increasing, and online retail is only going to grow. Geopolitical events and supply chain disruptions means there is more on-shoring and near-shoring demand, data centre demand is growing and on top of that some 60% of warehousing under 100,000 ft2 fails to meet energy performance standards – notwithstanding any other ESG issues arising for instance having a warehouse in the wrong place is going to increase carbon output– the direction of travel is that demand for industrial and logistics space is on the rise. In that light, anything that holds back developers from delivering the right space in the right locations in the next 20 years is going to be a problem...”

So, what is the answer? And will it be adopted ahead of the General Election? No one can say for sure but there are some ideas being put forward. Bottle says: “In conjunction with other trade associations, we are asking for a Logistics Minister in the next government. ‘Logistics’ is not the same as ‘Transport’, so it’s no good government telling us that DfT’s Freight Council will address all our needs. A cross-departmental approach is essential. We need a government that recognises fostering logistics growth is the key to unlocking wider economic growth.

Collaboration is seen as key and that is particularly true when it comes to planning. Savills head of energy and infrastructure Nick Green says: “On a national level, talking to the industry the bit that is missing is a clear cohesive policy guidance on logistics going forward.”

The resurgence of online retail

During the pandemic online shopping exploded increasing from around 19% of all retail spending to hit just over 30.7% at its peak in 2021 before falling back to 26%. During this time online retailers and the 3PLs serving them acquired extra warehouse space to serve this demand. In some cases possibly taking on too much space - either to squeeze out rivals in the chase for market share or else miscalculating the strength and depth of the phenomenon, which seemed to wane almost as quickly as it emerged as the UK and indeed the rest of the world plunged into post pandemic economic crisis made worse by a series of geopolitical events.

Colliers head of industrial and logistics Len Rosso says: “It certainly seems like online has been forgotten because the economy slowed but the reality shows it is still strong making up 26% of retail spend and set to increase as the economy gets going necessitating demand for more space.”

Research from Mintel shows that online retail is set to hit 29.1% by 2028. 

According to Knight Frank’s Head of UK and European Industrial Research Claire Williams in the latest Future Gazing report: “Households are spending more and more online, and the amount of fulfilment and distribution space needed to service this demand is rising.

“Online sales totalled an estimated £3,961 per dwelling on average in 2023, requiring approximately 5.4 ft2 of industrial and logistics floorspace (per dwelling). Based on forecast online penetration rates from Mintel, and retail sales and dwellings forecasts from Oxford Economics, this is expected to rise to £4,699 per dwelling by 2028 (2023 prices). This rise will mean that the anticipated growth in e-commerce by 2028 will raise requirements per dwelling to 6.4 ft2. To put this another way, for each additional dwelling forecast over the next five years an additional 38.2 ft2 of industrial and logistics stock will be needed to accommodate the increasing online retail demand.

According to Knight Frank, an additional 37 million ft2 of industrial and logistcs space will be required in the next five eyars, based on retail sales forecasts from Oxford Economics and Mintel.

“Our analysis of online distribution networks found that 20-25% of space is typically needed in ‘last-mile’ facilities as part of hub and spoke distribution models. The growth in online retail over the next five years is likely to require an additional 7-9 million ft2 of last mile logistics floorspace, with a greater proportion of this space needed in and around Greater London and the South East and East of England regions.”

For Hickman its fixing the planning system: “Fundamentally, the problems we are talking about are a consequence of the obsession with homes ahead of jobs in the planning system.”

“The logistics sector is proving to be the most productive in the economy and failing to provide the space for it just exacerbates the [productivity] problems. Homes and jobs go hand in hand you cannot prioritise one over the other. This goes to the heart of productivity issues and the challenge is we should be planning for more and we will be better for it not worse.”

He feels that: “We should talk openly and honestly about development on greenfield sites and even sites within the greenbelt. There is not enough brownfield land whether for housing or industrial and logistics so it makes sense to face up to that issue and concentrate on delivering sustainable, well balanced mixed-use communities and a key part of those communities will be commercial development delivering employment.”

Certainly, this has been mooted by the Labour Party - albeit exclusively for residential development. The party has put forward the idea that there is ‘grey belt’ - neglected areas such as poor quality wastelands and disused car parks that are in the greenbelt -that could be brought forward for development.

Colliers head of industrial and logistics Len Rosso champions reform of not just the planning policy but of the system itself: “Planning offices are understaffed and under resourced and we as customers are not being served. It will never be a quick fix but farming out of some smaller, simpler planning functions to the private sector such as individual residential extensions, and tree pruning orders could free up planning officers to focus on more strategic and long term planning issues.”

“Right now,” says Green, “the thing I am picking up on strongly is that the Labour policy in logistics terms is far ahead of the issue than the Conservative. Labour has an industrial policy and is talking about refining domestic supply chains while the Conservatives are relying on housing as a potential to deliver more political capital. Could industrial policy be a political football – probably not but there is potential for collateral damage.”