Thanks to online fulfilment and urban logistics centres, many predicted a megasheds decline. Were they right? Simon Jack investigates.

The Range 2

The growth of online and multichannel retailing in the past few years has focused attention on last-mile deliveries and smaller urban logistics hubs, raising doubts about the long-term future of megasheds covering more than 500,000 sq ft.

Retailers have wanted to keep more stock close to centres of population and downsized their central warehousing or relocated to smaller facilities as a result.

But, while there was a drop in demand for large facilities last year, 2016 has seen the megashed come back with a bang.

This has been led by online retailers, discount grocers and omnichannel retailers reorganising their supply chains.

According to figures from Savills there have been eight deals above 500,000 sq ft so far this year, already higher than the whole-year average of seven.

The 2016 deals to date amount to 7.8 million sq ft, which is 67% higher than the whole of last year and surpassed the total for 2014, which was a good year for large shed demand.

There was a bit of a misconception that because the major supermarkets were no longer in the market that the demand for very big sheds had all dried up. But that is not the case

Richard Sullivan, Savills

Savills says that the lull in demand was caused mainly by the big four grocers – traditionally the driving force in shed demand – withdrawing from the scene as they reassessed their business due to tricky market conditions.

Previously they had taken many large buildings, such as the 1 million sq ft facility at Dirft in Daventry owned by Sainsbury’s and Tesco’s 920,000 sq ft warehouse in Reading.

Savills head of industrial and logistics Richard Sullivan comments: “There was a bit of a misconception that because the major supermarkets were no longer in the market that the demand for very big sheds had all dried up. But that is not the case.”

Amazon has this year alone taken three units of more than 1 million sq ft (see box), The Range has acquired a site of 1.2 million sq ft in Bristol and Lidl has bought land on which to build 500,000 sq ft in Exeter and 600,000 sq ft in Bristol.

While Amazon’s needs have been dictated by expansion of its existing business and movement into new areas, omnichannel retailers had to alter their supply chains away from traditional models and look at integrating their online and store operations.

“Many are looking at how to streamline their operations within the new market dynamics and maximise efficiencies,” Sullivan says.

Integrating channels

A number of other retailers are currently looking for large facilities, including House of Fraser, which is planning a 750,000 sq ft unit in Peterborough, at Roxhill’s Gateway Peterborough development.

Decathlon is thought to have a 500,000 sq ft requirement in the Midlands, while Lidl is reported to be looking for up to 40 acres in the Northwest for another distribution centre.

John Lewis 4

John Lewis has brought together several strands of its logistics operations into a distribution campus

Charles Binks, head of industrial and logistics at Knight Frank, sees no conflict between opening smaller urban facilities at the same time as megasheds and believes that there is still a lot of scope for retailers to integrate store and online operations.

“Urban logistics is all about the delivery to the customer, megasheds about storage and fulfilment,” he says.

Many property experts agree that the demand for megasheds has a long way to go before it plays itself out.

Paul Hobbs, a director at Bilfinger GVA – joint agents at Central Park in Bristol, which will be home to both The Range and Lidl – says there are still market requirements.  

“There is no feeling that the megashed market is all done. Retailers are still changing their distribution patterns, so I think there are definitely going to be more of them,” he comments.

One factor that could provide a boost would be if the big four supermarkets came back into the megashed market, but there are varying opinions about the likelihood and timing of this occurring.

Colliers International director Steve Mitchell says there is no sign at present. “They are using the networks they already have while they wait to see what they should do next. They might come back next year but not at the moment,” he says.

The shed market is an ever-changing landscape. Can supermarkets still be a big factor in our marketplace? Yes absolutely

Bruce Topley, IDI Gazeley

Bruce Topley, senior development director of IDI Gazeley, is convinced that it is only a matter of time before the supermarkets do return.

“The shed market is an ever-changing landscape. Can supermarkets still be a big factor in our marketplace? Yes absolutely,” he says.

But options are limited. Those choosing to take very large facilities have to look at build-to-suit deals with developers or at buying land for self-development.

Since the recession the largest speculative warehouse has been 360,000 sq ft whereas before there were several of 500,000 sq ft to 750,000 sq ft. “I can’t think of any available standing building of that size,” Knight Frank’s Charles Binks says.

The current driving force in the sheds market is undoubtedly Amazon, which has taken a huge array of buildings this year, ranging from large megasheds to small and medium-sized facilities around the country.

Amazon’s warehousing requirements

Amazon at iPort

Amazon at iPort

In Doncaster, the company has taken a 1.1 million sq ft build-to-suit unit at iPort in Doncaster and also a 215,000 sq ft speculatively-built unit. These will add to two existing warehouses in the area.

This is in addition to a 1 million sq ft new building in Coalville, developed on its behalf by Mountpark. There is also a new four-floor facility currently under development in Tilbury, which will provide more than 2 million sq ft of floorspace when complete.

Kevin Mofid, head of industrial research at Savills, says that Amazon’s activities have had a major impact. “In the year-to-date we believe that Amazon has taken 28% of all space in buildings above 100,000 sq ft,” he says.

Other leasing activity this year includes signing up for two buildings in Manchester: a 271,000 sq ft warehouse at Manchester Airport and a 176,000 sq ft building at Trafford Park. In the Northeast it took 100,000 sq ft in Washington.

Buildings Amazon occupies have proved popular among investors. Mountpark sold the Coalville facility to a Korean investor for £126 million, one of the biggest industrial deals ever seen in the UK.

Site demand

One issue for the future is the amount of land available to build megasheds. Mark Sitch, senior partner of planning consultants Barton Willmore, says that there is a limited choice of sites with planning consent.

“Occupiers are still out there for this size floorspace but there is a paucity of large sites to accommodate demand,” he says.

Land in the best locations in the East Midlands and M1 corridor is in short supply and could become an issue for companies who want larger buildings going forward

Paul Weston, Prologis

However, developers appear to be addressing this situation. Construction intelligence specialist Barbour ABI says that planning applications for industrial, distribution and storage facilities above 500,000 sq ft rose to a peak of 37 in 2015 from 22 in 2013 and 26 in 2014 – there have been 11 so far this year up to August.

Not all the applications will result in consent and not all will necessarily be built but certain developers are keen to bring sites forward.

In the Northwest, for example, Bericote has plans for two buildings of 500,000 sq ft and 900,000 sq ft in Haydock. In Leeds, Evans Property Group and Harworth Estates could accommodate a 500,000 sq ft shed within the Leeds Enterprise Zone.

Prologis already has 1,000 acres of land with detailed planning permission in the UK, although the company’s senior vice-president, Paul Weston, says that overall land supply is becoming more constricted. 

“Land in the best locations in the East Midlands and M1 corridor is in short supply and could become an issue for companies who want larger buildings going forward,” he says.

Earlier this year Prologis announced that it was starting a joint venture with Wittington Investments at Lichfield in the West Midlands, which could provide 890,000 sq ft including a building of up to 688,000 sq ft.

Similarly, IDI Gazeley recently bought 62 acres, capable of accommodating 1.3 million sq ft in units up to 640,000 sq ft, adjacent to its existing Magna Park Milton Keynes development where John Lewis is the main occupier (see box above).

The supply chain is evolving. For us it’s not really a question of big or small. There is demand across the spectrum

Michael Hughes, Verdion

IDI Gazeley’s Bruce Topley says that the move towards larger sheds can be seen by analysing average sizes at its original Magna Park in Lutterworth, which began development in 1987, and at Magna Park Milton Keynes, where the first buildings were completed in 2009. 

“At Lutterworth, the average was 250,000-300,000 sq ft, while in Milton Keynes it is around 700,000 sq ft,” he says.

Michael Hughes, managing director of Verdion, says that as well as the bigger sheds there is still a need for other size ranges.

The company, which is developing a 1.1 million sq ft for Amazon at its iPort project in Doncaster and could develop a further 4 million sq ft at the site, is seeing interest for all sizes from 100,000 sq ft upwards.

“The supply chain is evolving. For us it’s not really a question of big or small. There is demand across the spectrum,” he says.

It seems very unlikely that the need for megasheds will go away in the foreseeable future but quite how the market shapes up is difficult to call, as Savills’ Richard Sullivan points out.

“No one could have predicted the level of change there has been in retailing and in the next five years it is hard to second-guess where the market is going to go and what impact there will be on the need for bricks and mortar in the supply chain,” he says.

John Lewis shapes megasheds market

By bringing logistics operations together, John Lewis estimates it will be able to reduce the number of parcels it sends by 850,000 a year

When two new John Lewis distribution centres became operational at IDI Gazeley’s Magna Park Milton Keynes in September, to join an existing facility at the site, it typified the structural changes shaping the megashed market.

John Lewis 1

By bringing logistics operations together, John Lewis estimates it will be able to reduce the number of parcels it sends by 850,000 a year

By bringing together several strands of its logistics operations into a distribution campus it is able to combine different types of delivery together, for example a suit and an iPad or a jacket and moisturiser.

Magna 1, which opened in 2009, handles smaller items whereas Magna 2 is for hanging garments.

As well as handling deliveries to the company’s 46 stores, the two facilities are connected by a bridge which enables product to be transported between the two and consolidated into a single home delivery or click-and-collect order.

Terry Murphy, John Lewis national distribution operations director, says that this has several advantages. “In the past the customer might have received two parcels. This system is more convenient, more efficient and better from a corporate social responsibility point of view,” he says.

In fact, John Lewis estimates it will be able to reduce the number of parcels it sends by 850,000 a year and the miles driven by delivery vehicles by 190,000 miles.

The third facility, Magna 3, is for bulkier ‘two-man’ deliveries of items such as sofas, beds and TVs. The facility serves as a national storage centre and delivery hub for the northern Home Counties – the three facilities together provide 2.4 million sq ft of space, including mezzanines.

As well as providing the chance for John Lewis to integrate its various operations more closely, Milton Keynes was considered ideal as a location.

“Geographically it is very good for us. We can reach London easily and are close to Junctions 13 and 14 of the M1. Milton Keynes is a growing city, allowing us good access to partners for recruitment,” Murphy says.

Impressively, John Lewis is able to reach all of its stores, including Aberdeen, with click-and-collect orders by lunchtime the day after they have been placed.

This feature appears in Retail Week’s Industrial Warehousing supplement, out this month. Read the supplement in full here.