Occupier Contraction? Not in distribution warehousing

When talking to investors and landlords of distribution warehouses, their main concern is faltering occupier demand amid the Eurozone sovereign debt crisis and deteriorating economic growth projections. Are those worries justified?

The story of 2011 is that it was better than expected, and significantly better than figures indicated in July-September when take-up temporarily contracted. In the end, total take-up peaked 59% ahead of the 10-year annual average!

Despite economic uncertainty, two months into 2012 demand remains healthy: perhaps partly due to demand lagging economic growth, as occupiers are still pursuing their space requirements determined during a much brighter economic context earlier last year.

While it is safe to assume that falling manufacturing output and exports will lead to slowing distribution warehousing occupier activity, there are robust reasons why demand should remain healthy:

  • Leading indicators have been trending upwards. The Morgan Stanley Global Manufacturing Purchasing Managers Index (PMI) signalled improving market conditions in January for the second month running. Manufacturing PMIs in Europe improved in most countries covered, with Germany and the UK returning to growth – albeit remaining below the 50 point no-change mark elsewhere. Furthermore, the European Commission’s Manufacturing Sentiment Index points to better expectations for export volumes and employment in both the EU and the Eurozone.
  • Retail sales are sustained by strong online growth. While some retailers might see sales figures decline in “traditional” stores, we expect it to be offset to a significant extent by online sales. With e-commerce set to grow and spread further across Europe, there remains significant demand from retailers to adjust their distribution networks.
  • Occupiers will maintain their pursuit of network optimisation, improving overall supply chain management and gaining competitive advantage from improved lead times.

As such, I am confident that occupier activity will remain in good shape this year. In Western Europe, Germany will perform on a high level. However, Poland and Russia will increasingly become strong contestants for the remaining “top 3” rankings – competing with France, the UK and the Netherlands. Other selected markets will see continued healthy demand too – albeit take-up will remain on significantly lower levels than in the leading markets.