Third-Party Logistics to Continue Pushing Up Leasing Demand in India in 2024: CBRE Report

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The demand for leasing high-quality warehousing space in India is expected to remain robust throughout 2024, according to a recent report from real estate consultant CBRE, which anticipates that space take-up will stay within the range of 2023 levels. Key transaction activity is projected to be driven by industrial and logistics sectors in Mumbai, Delhi-National Capital Region (NCR), Bengaluru, and Chennai, with the possibility of improved leasing volumes in markets like Ahmedabad and Pune.

Despite global and domestic macro-economic uncertainties, a report by the US-based commercial real estate services and investment provider CBRE titled ‘India I&L Outlook 2024’ suggests that the leasing demand for high-quality warehousing space in India—emphasizing operational efficiencies, safety compliance, and improved contingency planning—is expected to remain robust throughout 2024.

Logistics, warehousing leads demand for leasing

In 2023, there was an unprecedented surge in the demand for industrial and logistics spaces across major Indian cities, witnessing an 8 percent increase in leasing activity, as indicated by the CBRE report. This surge is primarily attributed to heightened demand from third-party logistics (3PL) companies. Additionally, engineering and manufacturing firms accounted for 17 percent of the overall leasing activity.

Within the overall leasing activity, 3PL players made a substantial contribution, accounting for 45 percent. Under their influence, leasing of industrial and logistics spaces increased to 38.8 million square feet in 2023 from 36 million square feet in the preceding year.

This rise can be attributed to limited infrastructure capabilities, prompting occupiers to opt for the cost-effective services of 3PL firms. Various sectors, including e-commerce, retail, and manufacturing, continue to outsource their supply chain operations to 3PL firms, enabling them to reduce costs, meet storage requirements, achieve operational flexibility, and efficiently manage labor outsourcing needs.

The overall increase in manufacturing activity, propelled by government schemes like the Production Linked Incentive (PLI) schemes, coupled with the positive influence of infrastructure development and widespread internet penetration, has resulted in a notable rise in digital purchasing decisions and boosting e-commerce activity.

These factors are expected to prompt occupiers to intensify their attention on upgrading and expanding operations in tier-1 cities, as well as extending local distribution networks in emerging logistics hubs in 2024.

Leasing activity in key cities in 2023

Fueled by rising demand for premium spaces, limited availability of quality supply in certain areas, and a surge in land costs, rental values experienced an annual increase in key micro-markets across cities, with the exception of Kolkata.

The leasing of industrial and logistics spaces in Mumbai reached a record-breaking 9.9 million square feet in 2023, surpassing the 7.3 million square feet recorded in the preceding year. In Hyderabad, the demand grew from 3.7 million square feet in 2022 to 4.3 million square feet in 2023.

Leasing of industrial and logistics spaces in Chennai rose from 3.9 million square feet in 2022 to 6 million square feet in 2023. In Pune, leasing increased from 0.7 million square feet to 1.7 million square feet. The demand for industrial and logistic warehousing spaces in Ahmedabad also saw growth, reaching 2.2 million square feet last year from 1.2 million square feet in 2022.

However, in Delhi-NCR, the demand dropped to 7 million square feet in the past year, down from 9.4 million square feet in the calendar year 2022. Bengaluru also experienced a decrease to 4.7 million square feet in 2023 from 5.9 million square feet in the preceding year. Similarly, Kolkata observed a decline to 3 million square feet from the earlier 3.8 million square feet.

2024 investor outlook

Per the CBRE report, the completion of new warehousing projects might experience a slight delay in tier-2 cities due to escalating land costs and prolonged acquisition timelines.

Nevertheless, capital inflows from both foreign and domestic investors are expected to persist for greenfield and brownfield acquisitions. Joint ventures and joint development agreement partnerships are anticipated to remain the primary investment channels for investors with a focus on infrastructure and leasing.

CBRE anticipates a continued rise in the proportion of projects completed by major developers supported by institutional funds in India.

Furthermore, as as more MNCs pledge to achieve decarbonization and carbon neutrality and the imperative to decrease carbon emissions intensifies, adherence to environmental, social, and governance (ESG) standards will be an influential factor in infrastructure building and leasing activity. CBRE expects developers with investment-grade credentials in India to collaborate with occupiers in working to decrease energy consumption levels and implement sustainable practices in warehouse operations.

In terms of choosing locations, increase in transportation costs will likely compel industry players to lease additional space in proximity to industrial hubs, consumer hubs, and crucial transportation nodes.

CBRE Report: Insights for India Real Estate Investors

  • Logistics optimization: Lessees are focusing on optimizing ‘first mile,’ ‘middle mile,’ and ‘last mile’ logistics for timely and cost-effective deliveries.

  • Expansion strategies: The report suggests expanding distribution networks into new logistics hubs and key tier-II cities. This strategy provides proximity to a larger population and can result in relatively lower operational costs.

  • Facility preferences: Occupiers increasingly prefer warehousing facilities with specific features:

    • High ceilings: Accommodate automated stacking systems.
    • Ample loading and unloading zones: Facilitate efficient logistics operations.
    • Robust fire safety systems: Ensure the safety of the warehouse and its contents.
    • Dependable power backup provisions: Enhance operational resilience.
  • Technology adoption: CBRE notes a rising adoption of artificial intelligence and automation within warehousing operations. This technology helps identify and address inefficiencies, making operations more streamlined and efficient.

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