Why Warehousing Absorption Will Reach Record Highs In 2022
The warehousing space in India has gone through a complete metamorphosis. From unassuming go downs to now sophisticated, tech-driven storage systems- Warehouses have come a long way and continue to marvel the logistics industry. Today, they don't serve as only storage spaces but are in fact an integral link in the entire supply chain ensuring direct impact on operational efficiency.
What has furthered their growth is the massive digital revolution that has everyone opting for online purchases. With the boom in online purchasing, the need for warehouses became bigger than ever as the SKU count grew exponentially. As of 2022, warehouse absorption is at an all-time-high at 42.5 million square feet- up 17 per cent from the pre-COVID highs of 36.3 million sq. ft. in 2019.
So what are the reasons for this drop in vacancy?
Multiple Demand Sources
Third Party Logistics continues to be the primary driver for warehousing leasing at 42%.
D2C brands are on the rise, their dependence on logistics is a necessity because all operational actions have direct bearing on the brand. 3PL then becomes a requirement which only reinforces the demand for warehouses. The festive season earlier this year further uplifted the market sentiments which has positively impacted the space take-up for 3PL.
“But 3PL is not a lone Wolf, it is surrounded by its pack of other industries that create as much warehousing demand- Manufacturing, retail, ecommerce.”
The manufacturing sector has been the second key industry to dominate warehousing consumption with a rate of 17%. This sector is steadily turning to a more automated and process-driven sector, increasing efficiency and boosting production. Moreover, government schemes like the Production Linked Incentive, National Manufacturing Policy and Make In India are creating a favourable environment for expanding India's manufacturing sector.
Retail has seen the most noticeable jump in terms of warehousing demand as consumers went through a major alteration with respect to consumption patterns. Consumers are now opting to shop consumer durables, online, across grocery, apparel, electrical items thus creating demand for storage space. What’s more, they are also opting for quicker deliveries that indicate a preference for fast and premium service.
“With respect to ecommerce, there has been relative dip in demand but let us not mistake it for a receding trend”
On the contrary, Ecommerce took into account the unprecedented growth that took place in the two years and locked in on warehousing space well in advance. Cut to 2022, what we are witnessing is demand matched by supply and not a dip. It’s only a matter of time when Ecommerce takes the lead in warehousing space and drives the upward demand.
Tier II and Tier III are the future:
Opportunities for demand in warehouses are seeing an expansion even in terms of location. There was time when Tier I served as primary markets but today that story is witnessing a turn of events
“Tier II & Tier III cities is that plot twist in the warehousing story that we are savouring in this moment. They are growing to be important consumption markets owing to increased digitization, higher disposable incomes and exposure to new-found needs.”
These fast growing markets made up for 61% in 2022 as opposed to 51% last year.
Tier II and Tier III are also seen as strategic connectors to the main Tier I market. With tactical connectivity, relatively lower set-up and labour costs, in-city warehouses will become more mainstream in Tier II & III.
“An increase in Grade-A demand was just waiting to happen. We long identified this and set-up global sustainable and compliant practices starting with our first warehouse in Bhiwandi”
The average sizes of Grade-A warehouses have increased by 2x from 80,000 sq. ft. in 2016 to 160,000 sq. ft. in H1 2022. They are growing in demand due to their structural advancement in terms of floor load capacity, better layouts and their focus on strict protocol like high safety precautions. The overall warehouse supply witnessed a CAGR of 17% during 2016-2021 to 258 million sq. ft. with an increase in the Grade-A supply mix from 30% in 2016 to 45% in 2021.
When the country sets up a conducive environment it only accelerates growth and the warehousing sector is witnessing substantial support in the form of several policies.
- Goods & Service Tax
The GST revolution heavily helped with consolidation, instead of five warehouses and increasing complexity, we are now looking at premium, grade-A centralized hubs that will not only improve operations but also cost efficiency.
“Our home ground is brewing with innovation thus inciting a need for interactive, tech-driven warehousing spaces”
- Make in India and PLI
When growth is incentivised, you are creating a possibility for unexpected innovation. These schemes accelerate production that in turn creates a need in other sectors, warehousing being one of them. As long as the country is encouraging national production, storage systems aka warehouses will always be coveted.
MMLP and & NLP
These policies will enable digital integration into logistics thus eliminating time-consuming processes and access to real-time data. Transparency in operations will help plan for unanticipated events and regulate logistics costs.
This growing demand for warehousing facilities in India is showing no signs of waning out. Grade- A warehouse spaces are specifically on the rise, a record 55.8 million sq. ft of Grade A space is expected to be leased by 2023. With revenues expected to touch $2.8 billion by 2025, this sector is also proving to be a lucrative investment opportunity for international and domestic investors alike.
All facts point out to one truth: The warehousing sector is re-writing the real estate story and is set out to become the most sought-after asset class.