Pandemic creates warehousing boom

Warehouse
As COVID-19 boosts demand for online deliveries, the logistics sector is expanding its warehousing capacity and is set to implement multi-level properties in urban areas, following the lead of the likes of Singapore, Hong Kong and Taiwan.

 

Growing demand

In the US, for example, e-commerce sales jumped almost 32% between the first and the second quarters of 2020 to reach nearly $212 billion, according to the US Census Bureau News. 

The e-commerce expansion has caused warehouse employment to reach the highest level ever recorded with 1.25 million workers in the warehouse and storage sector in the US in September, according to preliminary numbers from the Bureau of Labor Statistics.

The rapid demand growth for warehousing space is a global phenomenon. In the UK, for example, take-up of logistics space in the third quarter of 2020 has surpassed the record-breaking level in the previous quarter to reach a total of 13.33m sq ft, according to latest research from global real estate advisor CBRE.

At sector level, pure online retail accounts for the largest proportion of take-up at 33.3%, reflecting the shift in shopping trends towards online throughout COVID-19, CBRE noted.

The demand continues across Europe. Currently, there is an under-supply and over-demand across the board, and this is reflected in rising rents and generates increasingly healthy returns for investors. P3 Logistics Parks, which operates in eight European jurisdictions, confirms that the vacancy rate for industrial properties is “extremely low” across most of the areas in which the company operates.

 

Developers' response

While UK warehouses used to be mostly located in the East Midlands for strategic reasons, developers’ attention is now steering towards urban areas and final mile deliveries to offer better service to clients, leading to an increased demand for multi-level properties.

Multi-storey warehouses are typically up to three storeys, but they can extend to 10 floors or more. Access to the upper levels can be via a goods lift or directly via ramps. 

The multi-storey warehouse concept is well established in a number of major Asian cities, including Hong Kong, Singapore, and Tokyo, where high population densities have exerted strong pressure on land values.

The rapid increase in ‘last mile’ delivery creates additional demand for urban warehousing worldwide. With urban space at a premium, multi-storey warehousing is now gaining traction in major urban centres across North America and Europe.

Like all real estate, constructing and operating large industrial warehouses comes with a level of risk. Fire is the one that normally has the gravest consequences, but among other risks that needs to be considered are theft, illegal entry with criminal intent, environmental risk caused by poor warehouse management and even damage caused by forces of nature.

 

Construction risks

•    Fire / water damage
As warehouses are generally single structures, a major fire before completion will cause substantial delays meaning the occupier/owner is unable to tenant the warehouse on time to start their revenue generating operation. Whilst these buildings will not have the same volume of bathrooms/washrooms as found in a residential or commercial office buildings, there is still the risk of escape of water incidents, which could cause a huge amount of damage to the occupiers’ contents if they have started installing these during the works phase.

•    Third party damage and injury 
When developments are located in urban areas, the short geographical distance from the end user customers considerably increases the Third Party Liability exposures as work will be carried out in densely populated urban areas.

Other third party exposures could include tenants fit out works, which may be deemed third party to the developer. Consideration needs to be given to the appropriate third party liability limits of indemnity.

•    Environmental liability
As sites are often on previously undeveloped land, liability can also arise from environmental damage. Developments could be near waterways, parks, farmland, and in close proximity to areas of natural beauty. Ground vibration from the piling works can trigger pollution liabilities arising both from “sudden and accidental” events and from gradual pollution events.

•    Delay in completion
The financial losses from a delay in completion of the structure could result from a combination of loss of revenue or anticipated rental income, continuing debt service payments and additional sales and marketing costs.

•    Professional indemnity
Since the design and professional exposures will be usually passed down the contractual supply chain to the contractors, sub-contractors, architects and engineers etc., it is important to check your supply chain carries the appropriate levels of professional indemnity insurance and maintains this for 12 years.

•    Terrorism
Construction sites can be targeted by terrorists as a method of slowing growth, and thought needs to be given to terrorism insurance, which will reinstate the construction works in the event of a terrorist act. Terrorism insurance cover is likely to be a contractual requirement within the build contract.

 

Operational Risks

The magnitude of losses caused by natural risks such as winds and lightning strikes depends on:
1.    The intensity of the natural phenomenon
2.    The construction methods
3.    Protection mechanisms against catastrophes of this type

•    Security
Due to their high volume of inventory, warehouses and distribution centres are often at high risk of burglary and theft, especially if inventory is high-value. Security risks come from both internal and external parties.

•    Risk vulnerability
Factors that lead to increased vulnerability to risk include the fragile nature of certain valuable merchandise and the severity of the damage that may be caused to the warehouse or merchandise by certain building materials.

•    Cyber risk
In the face of the increasing cyber threat to smart buildings, the exposures from such threats are extremely varied and may or may not result in specific property damage but considerable business interruption. Potential risks include breach of security controls, turning critical items off, stealing of intellectual property or disruption of building systems. 

The protection and complete safety of warehouses constitutes a growing concern not only for owners, but also for insurers and reinsurance companies. 

Developers should gather critical information, such as:

• Full construction details including the core of any cladding/composite/insulation panels;
• Responsibility for solar panels and if revenues generated by them are insured or protected;
• Lightning protection;
• Internal fire separation measures and sprinkler protection;
• Shelf and rack storage, the number of dock levellers and roller shutters, height of roller racking and what’s being stored.

Lockton has gained a deep understanding of how assets like warehouses “behave” from a claims perspective and is able to provide tailored risk management programmes to clients.

For further information, please contact: 

Jonathan Hackett, Partner
T: +44 (0)20 7933 2781
M: +44 (0)75 0780 8175
E: jonathan.hackett@uk.lockton.com

Rachel Norris, Senior Vice President
T: +44 (0)20 7933 2353
M: +44 (0)78 2550 3413
E: rachel.norris@uk.lockton.com

Rahul Sharma, Senior Vice President
T: +44 (0)20 7933 2781
M: +44 (0)75 0780 8175
E: rahul.sharma@uk.lockton.com
 

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