As customer demand grows, what can we consider as we expand our distribution networks?
Written by Aleks Sotero
The rapidly growing economy of the Philippines activated potential business opportunities into a warehousing and logistics sector that supports the promising landscape for innovative business solutions. Industrial developers compete for land that follows the infrastructure roadmap of the Philippines to and from Metro Manila, while occupiers compete for warehouse spaces that fall within their supply chains.
As of the second quarter of 2023, PRIME Philippines reported that warehouses across most industrial districts are more than 95% occupied despite having at least 34.9 million square meters of warehouse space. In the same period, there are almost 1 million square meters of demand for warehouse space in key provinces in the northern and southern regions of greater Metro Manila. At least half of this demand comes from 3PL and 4PL companies who want to expand their footprints in new markets or scale up existing operations.
The Philippines witnessed a remarkable surge in online shopping activities, driven by increased Internet availability in rural and urban areas, a tech-savvy population, and rapidly changing consumer preferences. The COVID-19 pandemic further accelerated this trend when consumers adapted to working from home. Now, coupled with employer demands for a 100% return-to-office and with weekends reserved for some R&R, the online shopping trend is here to stay as one of the preferred ways of buying goods and services. As a result, the movement of low- and high-priced goods and higher demand for warehousing and distribution services were required to fulfill online orders promptly.
Build-to-suit warehouses
The surge in customer demand also affected how businesses rapidly increased their warehouse needs, doubling or tripling space requirements and taking up all available space to accommodate their products. Some companies had to centralize their operations in strategic areas, building distribution hubs in provinces like Cavite, Laguna, Bulacan and Pampanga. By doing so, these businesses managed to take up at least 95% of all the warehouse spaces in the northern and southern districts of Greater Metro Manila (GMM), leaving behind old warehouses that could be more suitable to the storage needs of these businesses when renovated.
The lack of available warehouse space also created a gap in the market for such requirements to be fulfilled by developers and generated demand for build-to-suit (BTS) facilities. As of the first half of 2023, there is an active demand of around 150,000 square meters of floor space for BTS facilities in Luzon. Requirements range from 10,000 to 44,000 square meters in critically strategic areas like Metro Manila, Laguna, Batangas, Pangasinan and Bataan. One of the successful transactions that PRIME Philippines fulfilled was a 17,000-square meter BTS facility in Meycauayan, Bulacan, for a rapidly growing supermarket chain (see picture).
The limited supply of suitable warehouse spaces and complex negotiations with landowners are typical bottlenecks to growing this market. Real estate professionals are vital players in enabling this type of growth.
On the other hand, demand for BTS facilities from 3PL companies has been consistently active. In the last four quarters, some of these companies have pushed for expansion plans to grow their footprint across the country and accommodate their clientele’s logistics and warehousing needs. One advantage of an extensive BTS facility for 3PL companies is the easy customization of the warehouse space to fit multiple clients’ operational needs and requirements. Efficiently designed layouts can help streamline logistics processes such as inventory management, order fulfillment and transportation, reducing operating costs and faster turnaround times. A BTS building can also strategically locate facilities in its markets, reducing transportation costs and transit times.
Challenges to decentralization
For businesses that want to expand their operations and test pilot new markets, decentralizing their current operations could have a few risks and opportunities. The company can benefit from reduced transportation costs, faster delivery times, local market adaptation, improved customer service, and resilience to disruptions within the supply chain.
However, it also comes with a few risks such as increased operating costs: managing multiple facilities can be more expensive due to additional rent, labor, utilities, and maintenance expenses. If the business does not have automated inventory management, decentralizing to more locations can be challenging and may lead to potential inefficiencies and higher carrying costs.
Since there is an estimated 5% vacancy rate from warehouses in key industrial areas in the country, occupiers may find it challenging to decentralize their operations. For instance, a higher initial investment may be required in multiple locations to acquire land, build a facility, and find supporting infrastructure to benefit the business. Other issues can include coordination challenges, reduced economies of scale, supply chain visibility, and finding the right talent to operate the business.
According to the latest data on industrial warehouse spaces, there are at least 410,000 square meters of vacant warehouses in Bulacan, Pampanga, and Tarlac and more than 700,000 square meters in Cavite, Laguna, and Batangas. Most of these spaces are already located around existing supply chains of various sub-industries. They can be repositioned for co-warehousing arrangements, activating the untapped SME market’s potential for faster growth.
To meet customer demands, some occupiers are now looking to work with other occupiers to lease pallet positions as they decentralize from some of their more significant distribution hubs and tap into smaller markets. When allowed by the landlord, sub-leasing refers to a primary tenant renting out a part of their space to a subtenant through a sublease arrangement. The rented space is typically in pallet positions due to its seasonality in demand and availability. With this arrangement, the primary tenant retains the long-term lease agreement with the landlord and remains responsible for the property, including any maintenance and compliance items agreed upon on the lease contract.
However, requirements also change over time, and occupiers are now asking for higher specifications and better quality warehouses to future-proof their businesses. For sub-leasing arrangements, a subtenant can only enjoy leasing out the primary tenant’s unused or underutilized warehouse space while the direct lease is active. With the supply of modern and newer warehouses within industrial districts close to depletion, the opportunity to offer co-warehousing has gained momentum over recent years. This operation will allow occupier tenants to manage their seasonal space requirements more flexibly and efficiently.
A co-working space for goods
Co-warehousing, also known as shared warehousing, is like a co-working space for offices: it offers a strategic advantage to businesses looking to optimize their operations and streamline their value chain. If logistics companies decide to decentralize from their more significant distribution hubs and tap into smaller markets, co-warehousing facilities will be able to cater to this demand.
One of the advantages of co-warehousing is the scalability and flexibility that can adapt to the current business environment. Businesses can adjust their storage space requirements based on seasonal fluctuations and quickly test new markets without spending the significant capital expenditure of acquiring ample warehouse space. This flexibility can be particularly advantageous for local SMEs seeking to expand their market presence without heavy capital investment.
However, the archipelagic structure of the Philippines also slows down the potential of making rapid decisions to grow in the southern parts of the country, such as the Visayas and Mindanao regions, since it would entail higher logistical costs if finished goods are mainly coming from Luzon.
One of the critical success factors in enabling the opportunity for co-warehousing is enhancing the existing operational facility of an unutilized warehouse building through services such as renovating the space to maximize available capacity, inventory management, order processing, and logistics support. With these value-added services, growing businesses can focus on their core competencies and delegate the complexities of warehousing and distribution to experts in the field.
Another factor is the collaboration between businesses sharing the same facility, which can lead to valuable networking opportunities, knowledge-sharing, and potential synergies. For instance, companies involved in complementary industries may find opportunities for collaboration that can lead to cost savings or the development of new products and services.
The Philippines’ growing economy and changing consumer behavior is driving increased demand for warehousing and logistics services. BTS facilities and co-warehousing are emerging as flexible solutions to meet this demand. At the same time, decentralization offers opportunities and obstacles for new and existing businesses seeking to expand their operations. The availability of warehouse spaces in critical provinces and the untapped potential of the SME market also present some exciting prospects for the warehousing and logistics sector in the country.
Philippine industrial districts in numbers
Current warehouse supply: 34.9m sqm
Occupancy rate: 95.2%
Warehouse availability in Bulacan, Pampanga and Tarlac: 410,000 sqm
Warehouse availability in Cavite, Laguna and Batangas: 704,000 sqm
Warehouse availability in Metro Cebu: 84,000 sqm
Warehouse availability in Metro Davao: 52,000 sqm
Source: PRIME Philippines research as of September 2023
About the author
Aleks Sotero is assistant vice president for research and advisory of PRIME Philippines. Jonas Asuncion, Sean Chua and Krisa Marquez contributed to this article.
PRIME Philippines is the leading real estate consultancy firm for emerging markets with offices in Manila, Cebu, and Davao. To learn more, visit primephilippines.com, or follow them on Facebook at facebook.com/PRIMEPhilippines.