CBRE: Outlook for China’s Real Estate Market in 2022 – Logistics and Warehousing

Demand for high-standard warehouses will continue to grow rapidly in 2022

In 2021 , China's domestic express delivery business and export growth (in US dollars) both reached 30% . The dual circulation efforts have jointly driven a sharp increase in the demand for warehousing fees in e-commerce, third-party logistics and manufacturing. The net absorption of high-standard warehouses in 19 Chinese markets tracked by CBRE reached 6.6 million square meters in 2021 , up 60% year-on-year and 40% higher than the historical high in 2017 .

The net absorption of high-standard warehouses will exceed 6 million square meters in 2022

CBRE's 2021 China Logistics Tenant Survey shows that nearly 70% of the companies surveyed plan to further increase their domestic warehouse property portfolio in the next three years. E-commerce and third-party logistics companies, which contribute 80% of the leasing demand for high-standard warehouses, have the strongest expansion expectations.

CBRE believes that the domestic high-standard warehouse leasing market will remain highly active in 2022 , and the annual net absorption is expected to exceed 6 million square meters for the second consecutive year.

Three major driving forces lead the development of the logistics and warehousing market in the 14th Five-Year Plan

In the medium and long term, the continuous penetration of e-commerce and the emergence of new business models, the growth of supply chain logistics demand in the process of manufacturing upgrading, and the promotion of regional trade and logistics by the implementation of RCEP will become the three major engines for the development of the domestic high-standard warehouse market during the 14th Five-Year Plan period. In addition, the importance of intelligent, efficient, cold chain, and green in future warehouse configuration will become increasingly prominent.

1

E-commerce continues to grow

• According to the 14th Five-Year Plan for E-commerce, China's online retail sales will increase by 44% during 2020-2025 .
• New models such as live streaming e-commerce, fresh food e-commerce, and cross-border e-commerce have broad room for growth.

2. Financing is active and third-party logistics is accelerating its expansion

• In 2021 , the amount of financing in the logistics industry will increase significantly by 340% , and the construction of warehousing networks will be further accelerated.
• Supply chain logistics has become a new growth point for third-party logistics.

3. Favorable policies

• The formal entry into force of RCEP will stimulate cross-border trade in the region, especially benefiting logistics needs in the eastern coastal and southwestern regions.
• During the 14th Five-Year Plan period, the government will continue to support the construction of 120 national logistics hubs and the development of cold chain logistics.

E-commerce is developing in an orderly manner under anti-monopoly, and there is broad room for growth in innovative models

In 2021 , the national online retail sales of physical goods reached 10.8 trillion yuan, a year-on-year increase of 12% . At the same time, although antitrust and tax compliance have caused short-term industry rectification and shocks, breaking down platform barriers and creating a fair business environment will be conducive to the long-term orderly development and continuous innovation of e-commerce.

The 14th Five-Year Plan for the Development of E-commerce Businesses sets a growth target of 44% for 2020-2025 . Judging from the market performance in 2021 , it is highly likely that the actual growth rate will exceed expectations. The rapid growth of innovative models such as sinking markets and fresh food e-commerce will continue to benefit warehousing demand. The CBRE Global E-commerce Outlook report released in 2021 predicts that every additional $ 1 billion in e-commerce sales will create 1 million square feet ( 92,903 square meters) of warehousing demand. According to this estimate, theoretically, the storage area required for the development of domestic e-commerce during the 14th Five-Year Plan will be nearly 70 million square meters.

The penetration rate of e-commerce in the fresh food sector is still low, and the potential for warehousing demand is huge

With the closure of some platforms and the cooling of subsidies, the rapidly developing fresh food e-commerce after the epidemic has entered a period of industry integration. However, Alibaba, Pinduoduo and other leading e-commerce companies have focused on the agricultural products field, and with the support of relevant policies, fresh food e-commerce has great room for growth in the long run. According to Forrester's forecast, the total scale of China's fresh food retail in 2021 will be close to RMB 9 trillion, while the e-commerce penetration rate is only 9% , far behind retail categories such as consumer electronics, clothing and shoes.

According to CBRE statistics, in 2021 , fresh food e-commerce companies leased more than 400,000 square meters of high-standard warehouses in major cities , still a significant increase of more than 80% compared with 2020. With the rapid increase in penetration rate, we expect fresh food e-commerce companies to continue to expand their warehousing facilities in metropolitan areas with dense consumer populations.

The development of fresh food e-commerce will also promote the growth of cold storage demand. Our logistics tenant survey shows that 31% of the tenants surveyed said that they will increase their demand for cold storage in the future, mainly involving third-party logistics, fresh food retail / grocery or catering and pharmaceutical industries.

In addition to fresh food e-commerce, live streaming e-commerce, cross-border e-commerce and the C2M model behind it will also jointly provide sustainability for the development of e-commerce and warehousing needs.

The financing wave in the logistics industry has driven a new round of leasing demand, and the supply chain has become a new growth point for third-party logistics

According to public data, the amount of financing in the logistics industry in 2021 increased by 340% year-on-year to 181.6 billion yuan, including 12 companies successfully listed, 15 major mergers and acquisitions, and multiple private placements. In addition, companies such as Gooday Logistics and Anxun Logistics have also proposed listing plans in 2022 .

JD Logistics, YTO Express, SF Holding and other third-party logistics companies plan to invest more than 50% of the financing amount in infrastructure network construction and upgrading. Taking JD Logistics as an example, according to its prospectus, 55% of the IPO funds will be used for domestic and overseas warehousing network expansion and upgrading, cold chain logistics, and increasing transportation routes. CBRE believes that this will drive a new round of high-standard warehouse leasing demand for third-party logistics companies, especially in first-tier metropolitan areas with the most intensive orders and important transportation hubs.

Supply chain becomes a new growth point for third-party logistics, and manufacturing warehousing needs to be upgraded

As China's manufacturing industry continues to transform towards high technology and high added value, and the three major e-commerce companies Taobao, JD.com, and Pinduoduo have launched the C2M strategy since 2020 , the manufacturing supply chain has accelerated its evolution towards specialization, high efficiency, and flexibility. Integrated supply chain services have become a new growth point for third-party logistics, and will also drive the demand for manufacturing warehouses to upgrade to high-standard warehouses that are more in line with automation and digital supply chain deployment. In 2021 , Xiyin's high-standard warehouse leasing of more than one million square meters in the Pearl River Delta has, to a certain extent, demonstrated the explosive growth in demand for warehousing upgrades that can be created by the C2M model and digital supply chain empowering traditional manufacturing.

From a broader perspective, the upgrading of the manufacturing supply chain will gradually promote the platformization and efficiency improvement of industrial product procurement. The current penetration rate of industrial product B2B e-commerce is less than 5% , which is a blue ocean area for future high-standard warehouse demand.

The supply window of first-tier metropolitan areas is coming, and the backlog of rental demand is released

In 2022 , the new supply of high-standard warehouses in 19 major domestic markets is expected to exceed 7 million square meters, a record high, but the distribution structure of supply tends to be optimized.

The new supply in Guangzhou, Shanghai and Changshu will exceed 1 million square meters each. Considering that the vacancy rate in the above-mentioned markets and surrounding areas has remained below 10% in recent years , it is expected that the entry of new projects will promote the release of pent-up leasing demand. Our 2021 logistics tenant survey shows that 55% of the surveyed companies plan to expand their warehousing facilities in first-tier metropolitan areas in the next three years .

On the contrary, after three years of peak supply, the new supply in the three cities in central and western China - Chengdu, Chongqing and Wuhan - will show a significant decline in 2022 .

In 2022 , the overall vacancy rate of high-standard warehouses across the country will increase slightly by 0.6 percentage points to 14.0% , but the sharp reduction in new supply in 2023 will reduce the vacancy rate to around 11% .

In view of the trend of strong supply and demand, CBRE expects the national average rental index of high-standard warehouses to rise by 1.9% in 2022 and further accelerate to 2.4% in 2023. The average annual growth rate of first-tier cities and satellite markets around Shanghai is expected to reach more than 3% , while the rents in Chengdu and Chongqing will rebound in 2022 as the supply and demand relationship in the central and western markets is rapidly restored , and the rents in Wuhan will gradually stabilize in the next two years.

Conclusion and recommendations: Tips for tenants

1. Seize the supply window in 2022 in the first-tier regions and advance the warehousing network expansion plan in core markets to reduce overall logistics costs.
2. Chengdu and Chongqing will turn into owner markets in the next two years. Tenants are advised to lock in better locations and long-term leases before rents start to rise sharply.
3. Actively adopt new technologies such as automated equipment and warehouse management systems to upgrade storage facilities to achieve long-term labor cost optimization and warehouse operation efficiency improvement. Tenants need to ensure that the warehouse's floor height, load-bearing capacity, loading and unloading doors, electricity and other configurations match the operational requirements after technological upgrades.
4. During the project development phase, we communicate with the owner about customized requirements, such as cold storage, high-density stereoscopic warehouses, etc.
5. Promote the integration of warehouse leasing site selection, operations and corporate ESG goals.

Advice for owners

1. We will continue to focus on investment opportunities in first-tier cities and their surrounding areas, as well as major inland logistics hubs such as Chengdu, Chongqing and Wuhan. In particular, as new supply in Chengdu and Chongqing will decrease rapidly in the next three years, rents will bottom out and rebound sharply.
2. Introduce tenants during the warehouse design and development phase and create customized warehousing; or maintain the versatility and flexibility of the property during project development to accommodate future tenants' needs for cold storage and other customization.
3. Consider increasing capital expenditure and operational optimization on green energy conservation of properties to meet the increasing sustainability requirements of governments and tenants.
4. Owners with large-scale warehouse networks can consider increasing investment in warehouse management systems, smart supply chain systems, warehouse automation equipment, etc., and providing integrated supply chain service solutions to help tenants improve efficiency and reduce costs, thereby expanding diversified income and enhancing tenant stickiness.