China’s occupied Grade A warehouse stock set for continuous growth after quadrupling over 2010s

Shanghai, May 20, 2020— The latest research report from JLL (NYSE: JLL) shows, over 2010-2019, occupied Grade A warehouse stock in China’s leading markets grew at an impressive annual rate of 18.4% to rise from 11 million sqm to 48 million sqm. By 2030, China’s Grade A warehouse market will be bigger, more complex, more mature, and even more essential than it is today.

JLL’s latest white paper “Order Delivered: China Logistics Property in the Decade Ahead” traces the outlook of China’s logistics market and outlines the trends that will allow investors and developers to future-proof their strategies and properties, and concludes with an outlook for the investment market.

The COVID-19 outbreak may act as a drag over the short term, but the long-term outlook for China’s consumer sector remains strong by almost any standard – and continues propelling new requirements for distribution space. National retail sales grew at a CAGR of 11.2% over 2010-2019 to reach RMB 41 trillion. Forecasts anticipate that China’s retail sales will grow at an annual rate of 9.5% over 2019-2030 – down from before, but this modest deceleration pales in comparison to the massive absolute leap in annual retail sales, which are expected to reach RMB 112 trillion by 2030. 

 “China’s consumer market continues to grow, making up for slightly slower growth rates with sheer size. As consumer trends evolve, investors and operators must adapt to changes in how retail sales manifest as warehouse demand.” Richard Huang, Head of Supply Chain and Logistics Service for JLL in China noted, “With some of the market’s biggest warehouse occupiers increasingly turning to self-use space, it is essential for property owners to consider other evolving and emerging types of tenants.”

Increasingly sophisticated consumers are expecting ever-faster omni-channel delivery, but deficiencies of lower-quality warehouses can drag down firms’ efficiency and reduce their competitiveness. As a result, we expect to see a rising trend of tenants in upgrading to modern Grade A warehouses. Some tenants will be ‘pulled’ to Grade A buildings, voluntarily relocating from older projects to gain the benefits of Grade A specifications. Other tenants will be ‘pushed’ to upgrade, as local governments mark legacy warehouse parks for demolition and redevelopment. Tenants faced with this situation will face a choice, with some seeking out other non-Grade A warehouses, while others choose to pay a premium to upgrade to Grade A buildings.

Warner Brown, Research Director for JLL in China points out, “Technology will play a decisive role as warehouse occupiers maximize efficiency by making the best use of the highest-quality warehouse space available. This trend will drive occupiers in China’s vast network of low-quality warehouses to consider upgrading to Grade A properties. There also will be greater requirements for equipping warehouses for automation, cold chain, and other high-tech uses, and operators in turn must future-proof their assets to cater to these needs.”

Estimates from the China Association of Warehousing and Distribution put China’s entire universe of warehousing stock at just over 1 billion sqm in 2018. At that time, we tracked about 51 million sqm of mostly for-lease Grade A stock in the leading 24 markets, accounting for just 4.8% for the total. Even allowing for self-owned and built-to-suit Grade A buildings, the total amount of Grade A-quality buildings likely accounts for a small portion of China’s total warehousing space, which means a huge potential market for upgrading from non-Grade A properties.

Yet even as China’s retail boom has supported growth of consumer markets far beyond Tier 1 cities, the strongest growth in city-level retail sales has been concentrated in a select number of tightly-packed city clusters. Regional economic development initiatives with city clusters at their core will support high-quality economic development in the future, and will increasingly determine where consumers concentrate and where are the key opportunities for warehouse developers and investors. Areas like the Yangtze River Delta, Greater Bay Area, Beijing-Tianjin-Hebei, and Chengdu-Chongqing have done well over the past decade, and the government’s ambitious plans to foster the growth of city clusters will supercharge these regions while potentially supporting the emergence of new ones as well.

Mr Brown points out, “One of the biggest beneficiaries of these trends will be satellite markets: warehouse markets that are growing in small cities just outside of major urban centers. The most competitive satellite markets enjoy advantageous locations with quick access to both their clusters’ biggest cities and major markets, making them ideal locations for regional distribution centers that can reach consumers throughout each cluster with competitive cost.”

In early 2020, the outbreak of COVID-19 brought challenges to China’s logistics property market, but also opportunities for investors and developers willing to seek them out. As the outbreak recedes, we expect governments and firms to continue upgrading the logistics sector, with particular upside potential for supply chains and warehousing handling fresh foods, pharmaceuticals, and other essential goods. 

Mr Huang concludes, “China’s logistics market will continue to expand, and also grow with more complexities. Investors and developers can seize the opportunity and have a role in shaping the market over the next decade.”