Booming Market

Industrial warehousing driven by e-commerce and 3PL

The industrial warehousing sector has registered growth of over 20 per cent in the past two years. Warehouse stock increased from 138 million square feet in 2017 to 169 million square feet in 2018 and further to 211 million square feet in 2019 in the top eight Indian cities. The stock of Grade A warehouses has increased at a faster pace than that of Grade B warehouses. Factors such as implementation of the goods and services tax and rising investments in the sector have led to a demand surge for quality warehouses in Tier I as well as Tier II cities. Demand for warehouses has primarily been led by the third-party logistics (3PL) and e-commerce segments. The fast-paced penetration of online retailers such as Amazon and Flipkart in Indian cities is pushing up the demand for warehouses. There is also significant demand from the manufacturing and automobile/auto ancillaries sectors. Major players in the warehousing sector are increasingly developing built-to-suit units for customers with specific needs.

Size and growth

Warehouse leasing activity touched a historic high of 33 million square feet in 2019, increasing by more than 30 per cent on an annual basis. 3PL firms accounted for about half the leasing activity during the year. Besides, industrial warehousing space uptake in 2019 was dominated by small-sized transactions (less than 50,000 square feet). Of the total stock in 2019, Grade A warehouses accounted for a 42 per cent share while Grade B warehouses had a 58 per cent share.

The year 2019 witnessed 15 per cent year-on-year growth in total net absorption of Grade A and B warehousing space in the top eight cities. Delhi NCR, Mumbai and Bengaluru continued to lead uptake, while Kolkata, Chennai and Pune continued to be among key occupiers. Sectors such as 3PL and e-commerce are prompting the market to increase the development of Grade A warehousing space as leasors make the transition to spaces with global standard specifications. The share of 3PL in the total warehouse space absorption jumped from 36 per cent in 2018 to 48 per cent in 2019. The strong demand for warehouses is expected to drive market absorption and keep vacancy levels below 10 per cent.

Key trends and developments

  • Booming investments: Warehousing has emerged as a lucrative long-term investment bet. The growth of leasing activity and rising e-commerce penetration has raised the demand for warehouses. Real estate developers are willing to capitalise on the opportunity and are partnering with private equity firms and sovereign wealth funds for investments. Global investors are attracted by the warehousing sector’s high returns, healthy underlying assets, good leasing momentum and strong project pipeline. Investors find it an opportune time to adopt a platform approach that enables building an operating warehousing portfolio of scale without the limitations of fund life. As per Colliers Research, since 2017, the warehousing sector has seen investments of around $3.6 billion in India, and this is expected to touch $7 billion by 2021, as existing players expand their portfolios and new ones enter the market.
  • Service to micro markets: The warehousing industry is growing in terms of both clients and land acquisition. Better connectivity has become one of the key reasons for warehousing parks being set up in non-metro cities. Besides this, cheaper land costs have also motivated logistics and warehousing companies to make this shift. There is thus a surge in warehouse development in micro markets. Attractive leasing fees also makes these micro markets appealing for large clients. In addition, the demand from micro markets is increasing due to the rise of e-commerce.
  • Shift towards green warehouses: There is an evident shift towards green warehouses and adoption of sustainable warehouse designs. As part of the shift, warehousing spaces have adopted methods of operations including recycling and upcycling of materials and cutting down on energy consumption by opting for green initiatives.
  •  Rise in demand for land banks in key locations: The growing demand for faster delivery of goods has increased the demand for warehousing space in the country. As a result, there has been expansion in the land dedicated to the warehousing sector, especially in key locations near Mumbai that have witnessed a surge in warehousing demand from major e-commerce players. Chakan near Pune has been the most preferred location for the Maharashtra Industrial Development Corporation owing to its strategic location. Areas near Kolkata, which is the gateway to the Northeast, have also been in demand. Other strategic locations such as Hyderabad, Bengaluru, Chennai and Delhi NCR have also seen the rise for warehousing demand.

Smart warehouses – Need of the hour

With advancements in technological and physical infrastructure, smart warehouses are evolving to offer specific value-added services that can be customised to suit the needs of high-end clients. Though a large part of warehousing operations are still manual, some of the latest technologies including cloud software, drones, internet of things (IoT) and wearable devices are gaining popularity, thus transforming the supply chain space. As supply chain management assumes the function of a profit driver instead of being an overhead cost for industries like manufacturing and e-commerce, many businesses are opting for outsourcing a significant part of their operations to warehousing companies.

A case in point is GreyOrange which offers a very simple line of automated machines, which reduce human effort in warehousing and increase efficiency. GreyOrange Butler is an artificial intelligence (AI)-powered goods-to-person robotic technology for management of inventory and order fulfilment. It is known to reduce order fulfilment time and inventory replenishment time and increase throughput. GreyOrange Linear Sorter is a robust storage system for order profiling, routing and consolidation. It comprises next-generation IoT sensors, pneumatic arms and advanced software for profiling and sorting orders in warehouses. The automation start-up is responsible for handling warehousing for e-commerce players such as Flipkart, Jabong, Myntra and PepperFry. The start-up has also introduced an AI-powered butler, PickPal, which is an automated picking system. GreyOrange also provides warehouse automation for e-commerce and logistics companies outside India such as Ninja Van in Singapore and Loggi in Brazil.

The GreyOrange system has a number of advantages. It can be deployed in three-six months as compared to 12-18 months for a typical automated storage and retrieval system. It can also be adopted at a relatively small scale and ramped up as the need arises, instead of installing a huge system which is underutilised for the first few years. The capital investment thus gets distributed over a period of time. The flexibility of the GreyOrange system ties in with the emerging needs of e-commerce warehouses that have to be more and more agile in handling a dynamic supply chain with fluctuating stock-keeping units and shifting delivery timelines. This is where the real-time processing capabilities of Butlers come in, with a higher payoff at a lower cost.

Outlook

Going forward, the stock of Grade A and B warehouses is estimated to reach 188 million square feet and 191 million square feet respectively in 2023 in the top eight cities, according to global real estate services firm JLL. Increased capital infusion will ensure that more quality space is built to fulfil the demand for warehouses. The implementation of government initiatives such as the National Logistics Policy and the Draft National E-commerce Policy as well as large-scale infrastructure development are expected to promote investment, thereby further improving the overall stock of warehousing space in the country. Rental values are expected to continue to increase, driven by newly released investment-grade assets. Developers are also expected to enhance their service offerings to retain tenants and develop new income streams such as pre-quality checks, customs clearance support and procurement solutions. Despite the COVID-19 lockdown limiting operations of many industries, the warehousing sector has a bright outlook on the back of strong demand and high investor interest.

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