Warehousing is dark horse of pandemic?

Industrial and warehousing sector records 44 million sq. ft. space absorption in 2021, driven by 3PL, e-commerce, manufacturing and tier 2 and 3 cities. Industrial experts share details on continuous growth trajectory.

Priyanshi Bana

While the world continues to grapple with the economic repercussions during the pandemic, the logistics and warehousing segment has emerged as dark horses of real estate. A series of government initiatives in the logistics and warehousing sector taken in the past few years have laid the roadmap for growth. The proposed National Logistics Policy and National e-Commerce Policy is expected to further boost the sector.

According to the International real estate advisory firm Savills India, industrial and warehousing space absorption stood at 44 million sq. ft. in 2021 to include 35.1 million sq. ft. from Tier 1 cities and 8.6 million sq. ft. from tier 2 and 3 cities. Inspite of COVID-19 lockdowns and restrictions impacting construction activities, India witnessed a fresh supply of 45 million sq. ft. in 2021 where 36 million sq. ft. was from tier 1 cities and 8.9 million sq. ft. from tier 2 and 3 cities.

Anshul Singhal, MD, Welspun One Logistics Parks said, “The emergence of tier 2 and 3 cities as logistics and warehousing hubs is one of the significant trends seen after the intensity of COVID-19 lessened. Cities such as Ludhiana, Coimbatore, Vapi, Guwahati, Bhubaneshwar, Surat, Lucknow, Patna, Siliguri and Ambala-Rajpura belt have already been witnessing higher warehousing demand. With major e-Commerce companies and third-party logistic firms taking up large spaces to scale up operations to meet consumer demand, tier-2 and 3 cities have been witnessing greater warehousing absorption. Consumer behaviour has shifted, and they prefer online shopping mediums versus crowded brick and mortar stores. They have also become regular online shoppers demanding same day or next day deliveries. This consumer behaviour will continue to be permanent. In-city warehousing has become essential as a result of the nationwide lockdown, with tier 2 and 3 cities emerging as preferred investment destinations for warehousing.”

Similar to 2020, 3PL and e-commerce sectors continued to drive warehousing demand accounting 62 per cent of the total absorption in 2021, followed by manufacturing sector at 14 per cent.

Sandeep Chadha, Founder and Managing Director, Warehouster Capital Advisors says, “Warehousing is expected to be the first real estate segment to recover from the shock of the pandemic. In the medium-to-long term, the warehousing sector would grow manifold in the aftermath of the pandemic and the various changes it would perpetuate the world over. India’s warehousing market is expected to grow from $12.2 billion currently to $19.5 billion by 2025. As per a report by JLL, the overall warehousing space stands at 238 million sq. ft. at the end of 2020 compared to 211 million sq. ft. in the previous year.

Due to a greater internet penetration across India, e-Commerce companies are also betting big on growth in tier-2 and 3 locations, which are becoming the preferred warehousing hubs and investment destinations. The demand for Grade A-compliant, multi-storey warehouses will see a spike soon in these markets.

The e-Commerce boom in India would more than double the size of the warehousing space sought here over the next five years. The annual warehousing transactions in the top eight Indian cities would grow to 76.2 million sq. ft. by March 2026, from 31.7 million sq. ft. in 2021, as per Knight Frank. Industrial and warehousing space absorption is expected to grow by 83 per cent to 47.7 million sq. ft. in 2021, driven by robust growth in e-Commerce and manufacturing sectors, as well as rising demand in emerging tier-2 and tier-2 cities.

So, the impact is there and it is tangible and it is robust. It is expected to continue in the medium to long term. With Covid-19 ignited behavioral changes, the rise of tier 2 and 3 cities, and e-commerce penetration, Indian warehousing is looking at a bright future.”

Alexandre Amine Soufiani, MD and CEO, FM Logistic, said, “Ever increasing demand from the time sensitive e-Commerce sector has changed the dynamics of the logistics industry.  The logistics sector has become more organised as well as standardised. Grade A warehouses and increasing use of technology are the stepping stones, as they provide an ease in time-bound supply, customer satisfaction and
risk-free environment.

The booming e-Commerce market and a robust demand for the strengthening of retail supply chains across industries has bolstered the demand for Grade A warehousing facilities across the country. More so the ongoing pandemic has led to an increase in demand for quality warehousing space. e-Commerce and omni-channel operations have fuelled this growth. There has been a tremendous shift in consumer behaviour as the majority of customers across the country, including those in tier 2 and 3 cities, have resorted to online shopping. Customers today need to have access to their required products and, they need them within the shortest period of time. To deal with such situations, companies have understood the importance of having a real-time pulse of the market and are investing in Grade A warehousing facilities in smaller cities. This has helped them cater to the rapidly increasing customer base in these cities.

“FM Logistic India is focussed on developing Grade A multi-client facilities (MCFs) in the most important economic zones in India. Our Grade A MCFs are state of the art facilities that provide the best in class services and are built on par with international standards. Our MCFs provide A grade warehousing infra with FM2 flooring and vertical storage to enable our customers to optimize their space. We also provide top of the line storage and handling equipment. All these offerings help us to increase the operational efficiency of our customers. Thanks to a high flooring resistance of at least 6 T/m2, it allows up to 12m vertical storage which brings huge cubic efficiency and better productivity allowing competitive operational cost. Each of our facilities offer ample docking stations to enable the smooth flow of inventory without any bottlenecks,” Soufiani said.

Among the major cities in India, Delhi-NCR led with the highest absorption in 2021 at 18 per cent followed by Pune at 15 per cent. Mumbai and Bengaluru saw absorptions at 14 per cent and 11 per cent, respectively, while tier 2 and 3 cities accounted for 20 per cent.  Ashish Joshi, CEO and Founder, Landmark Capital said, “Companies are bullish in tier 2 and 3 cities as the consumer spending in these markets has increased significantly in the recent past. The share of tier 2 and 3 cities in retail consumption has increased manifold, and sales through e-Commerce have witnessed a 2.5X rise in the gross merchandise value (GMV) compared to tier 1 and metropolitan cities. Empirically, retail sales have a high correlation with warehouse demand i.e increase in retail sales result in higher
demand for warehousing. The companies are setting up warehouses close to consumption centres and therefore, warehouses in tier 2 and 3 cities are showing consistent growth.”

In addition, the tier 2 and 3 cities such as Rajpura, Lucknow, Coimbatore, Jaipur, Guwahati, Bhubaneswar, Nagpur, Kochi/Ernakulam, Indore, Hosur, and Patna witnessed around 8.6 million sq. ft. of absorption in 2021. These cities are poised to gain further momentum in 2022 and 2023 with e-Commerce and 3PL firm capitalizing on consumption-driven growth and pushing the demand for warehousing space. Singhal added, “e-Commerce has had an undeniable impact on online shopping due to higher penetration of online shopping habits of consumers in today’s economy. The ones who never shopped online discovered it is incredibly easy and, how it can benefit them in their daily life. With rapid growth in delivery volumes, the skyrocketing demand for specialized 3PL services and the new competitive environment have become mandatory for 3PL providers to provide services that both e-Commerce businesses and customers expect. The demand for premium last mile
delivery is booming, but so are the expectations around it, thus leading to increasing demand for warehouses in tier 2 and 3 cities.”

Joshi further added, “The total share of e-Commerce and 3 PL in warehousing has increased from 49 per cent in 2018 to 62 per cent in 2021. e-Commerce players are redesigning the supply chain and laying greater emphasis on last-mile delivery and are moving closer to consumption centres. We believe that the demand from e-Commerce players for warehousing will only increase going forward due to consumption shifts and digitalisation. As the business models of the players shift towards quicker delivery, demand for in-city warehouses will also rise. With the availability of better infrastructure and high consumer demand, warehousing activity will grow around tier 2 and 3 cities.”

According to Soufiani, “The Centre’s focus on making India a global manufacturing hub has caused warehousing clusters to expand rapidly beyond the top cities and into tier 2 and 3 cities. Also most of the tier 2 and 3 cities are aligned with industrial hubs as demand for A Grade warehouses in these cities has increased substantially.  Parallelly, the increasing internet penetration in rural areas, rising household income and the government’s push on digital in rural areas, has increased the pressure on manufacturing organisations to move closer to their customer base in these areas. In this endeavour to cater to the untapped rural customer base, organisations have realised the importance of developing quality and world-class warehousing facilities as these facilities not only offer operational excellence but also facilitate cost optimization.”

He added, “The ongoing pandemic has severely impacted several sectors, including the warehousing sector. As the internet penetration in India continues to increase, and with the shift in buying behaviour by consumers in smaller cities due to COVID-19, e-Commerce growth is likely to accelerate. This will increase the share of e-Commerce demand in the medium to long-term even in smaller cities. As a result, the need for fully compliant Grade A properties to increase the efficiency of the supply chain continues to gain momentum. Due to the nationwide lockdowns, delivering essential services to the masses became a necessity which has resulted in a significant growth in the tier 2 and 3 warehousing markets. The growing e-Commerce market, too, has increased the demand for warehousing in various cities across India, especially tier 2 and 3 cities. The e-Commerce market which grew significantly during the pandemic is forecasted to grow further in India.”

The overall industrial and warehousing space stock in tier 1 cities was at 266 million sq. ft. by 2021-end and. It is likely to reach 304 million sq. ft. in 2022 and 345 mn sq. ft. in 2023. Vacancy levels in tier 1 cities have increased from 8.4 per cent in 2020 to 9.4 per cent in 2021 and. Rental values remained stable in 2021 across the major cities with new projects delivered with improved specifications and of high quality environmental, health & safety (EHS) standards.

The market witnessed over 4,200 acres of manufacturing and warehousing land transactions across tier 1 and 2 cities of which 51 per cent was private land and 49 per cent was government land. Singhal averred, “The biggest factor driving warehousing demand is the adoption of e-Commerce, D2C (Direct to Customer), and omni-channel business models. A Knight Frank report points out that from 31.7 million sq. ft. in 2021, annual warehousing transactions in the country would increase to 76.2 million sq. ft. in early 2026. The 165 per cent additional space in warehouses will be inhabited by the e-commerce sector over the next five years. To enter the competitive market against the bigger sharks in retail and e-Commerce for warehousing space, in the D2C segment, the smaller firms have increased their enlisting of 3PL partners for services. As a result, the 3PL players account for a greater share of total warehousing demand now than a few years ago. The implementation of the unified GST regime in 2017 had acted as a contributing factor to a shift in preference for larger Grade A warehouses in India.”

The report highlights the industrial and logistics sector witnessed investments exceeding $1.5 billion in 2021 making the sector the highest after the office sector to attract such investments. Continued interest in this asset class was due to its growth potential and stable returns. The market is likely to witness continued and growing interest from investors in this asset class in 2022 as well.

Srinivas N, Managing Director (Industrial and Logistics) Savills India, said, “Work from Home and social distancing safety norms have fuelled e-Commerce demand and also Indian logistics and warehousing sector. Rising popularity of quick commerce companies and e-Commerce companies focusing on improving the delivery time and customer experience will result into rapid growth of urban warehousing. Reforms announced recently by the government to tighten import regulations, subsidies in terms of performance linked incentives (PLIs) to attract foreign capital and companies mulling over “China-Plus-one” strategy triggered due to pandemic outbreak have resulted into a transformation of the Indian manufacturing sector. Besides strong macro-economic fundamentals, government initiatives favouring infrastructure development in transport, water, power and communications and support to the growing sectors are likely to drive manufacturing and warehousing demand in India in 2022.”

According to Savills India, growing demand for warehouse space for manufacturing, e-Commerce and organised retail are likely to drive warehousing demand in 2022. Besides, Warehousing Policy envisaged by NHAI would be out in 2022, which aims to develop warehousing zones on the NHAI land banks under Public Private Partnership (PPP) mode, proposed national logistics policy by department of commerce likely to ease logistics bottlenecks and development of multimodal logistics parks (MMLPs) will push the growth of warehousing in the country. The market is likely to see absorption in excess of 40 million sq.ft., including tier 1, 2 and 3 cities in 2022. On the supply side, Savills India expects more than 45 million sq. ft. during the same period.