Knight Frank India has released its flagship report entitled ‘India Warehousing Market Report – 2023’ which assessed warehouse leasing in 8 primary markets and 17 other secondary markets in India. In the financial year 2022-23 (April 2022 – March 2023), the top 8 markets experienced historically high demand, reaching 51.3 million square feet (msf).
The FY17-23 compound annual growth rate (CAGR) was 24%. In particular, Mumbai, Bengaluru and Kolkata witnessed historically high transaction volumes in FY23. The surge in activity in the third-party logistics (3PL), manufacturing and retail sectors has contributed to increased demand for warehousing, the report said.
Compared to the previous year, with the 3-PL sector leading the way with a growth of 34% year-on-year. The manufacturing sector also experienced a significant increase in demand, growing at 23% year-on-year. However, the e-commerce sector recorded a decline in demand in FY23, mainly due to early capacity building in recent years and a gradual shift towards flexibility.
India has benefited from the continued move to decentralize manufacturing capacity from China, the most recent move by Apple, which now makes 7% of its iPhones in India, compared to just 1% in 2021, the report said.
The government’s focus on ‘Make in India’ and the Production Linked Incentive (PLI) scheme are also starting to bear fruit and continue to boost the prospects of the country’s manufacturing industry. On the other hand, storage rents in 7 of the 8 primary markets increased by 3-8% year-over-year in FY23.
Warehouse transactions in the top 8 cities
Demand in the storage market has maintained record highs from the previous year in FY 2023 compared to the office and residential markets which have yet to reach similar highs since the pandemic. While Mumbai and NCR led the market in terms of total transaction volumes during FY23, Bengaluru and Kolkata witnessed the highest percentage growth in annual transaction volumes at 25% and 18% year-on-year respectively.
Industry transactions and sharing
The manufacturing sector, including automotive and engineering, has experienced significant growth in its market share in total transactions since the pandemic eased, from 23% in FY 2021 to 30% in FY 2023. Among all user groups, the 3PL industry highest market share of 39% in FY 2023, highest market share since FY 2017 in any industry.
In FY 2023, 25% of the total space occupied by the 3PL sector was in Mumbai, followed by the NCR (National Capital Region) at 23%.
However, the volume traded by the e-commerce sector fell by 71% year-on-year in FY 2023 due to overcapacity built up during the pandemic to accommodate the surge in consumption. This fall in demand is expected to be temporary, as industry activity is likely to rebound once overcapacity is exhausted in the coming year.
With mobility returning to normal post-pandemic, consumer demand in hard format stores recovered, directly impacting retail uptake of storage space.
The sector’s share jumped from 4% in FY 2021 to 11% in FY 2022 as retailers had to quickly add storage capacity to meet rapidly increasing demand. This increase in demand continued into FY 2023, with retail users occupying 13% of the total traded space, marking a new high for the industry.
An estimated 13% of the volume traded during FY 2023 was for industrial use, i.e. for end use involving some form of manufacturing activity in industries such as the automotive industry, FMCG and FMCD. Among the top eight markets in India – Pune, Chennai and Ahmedabad are cities with a significant industrial base.
The industrial use market is expected to gradually gain momentum as the government’s focus on increasing India’s production weight begins to bear fruit.
Shishir Baijal, Chairman and Chief Executive Officer of Knight Frank India, said: “The storage market has experienced consistent growth, with transaction volumes exceeding last year’s figures, which were already the highest in history. This growth is not limited to the top eight markets, but has also extended to secondary markets, supported by improved infrastructure such as highway networks, rail systems and air transport. There is indeed a noticeable shift in the user groups within the warehousing market.”
While occupier demand in FY23 continued at FY22’s record levels, rents in most markets have maintained last year’s upward trajectory. Rental growth has been the bane of the market for the past decade, with developers facing fierce resistance from occupiers who have been extremely reluctant to back down on this point.
Inflationary trends in steel and cement caused by tight supply due to the pandemic and more recent rate hikes have left developers and operators little choice but to raise rates over the past two years. This coincided with strong demand during the period and maintained market equilibrium in favor of the developer, driving rents up 3-8% yoy in FY23 in seven of the eight primary markets.
Annual Share of Class A Transactions
The development of Class A storage facilities has continued to increase in recent years and currently makes up 40% of total inventory compared to 38% in FY22.
The larger storage markets of Mumbai and NCR have a significantly lower share of Class A warehouses as these are much older markets, and most of their inventory was built before the demand for Class A storage space gained momentum. Pune and Chennai have the highest concentration of Class A shares due to their primary demand base of auto and auto support users.
The rising trend of Grade A development continued to gain momentum in FY23, with developers increasingly focusing on higher quality park development that meets today’s standards and the higher throughput requirements of businesses today.
In addition to the emerging focus on sustainable development, there is an increasing need to improve the aesthetics of these warehousing parks and enable a better working environment.
59% of the listings coming online in the 8 primary markets in FY23 were Class A properties compared to 55% in FY22. In 6 of the 8 markets, the share of class A stocks increased in FY23 compared to the previous year.
Warehouse stock, inventory, vacancy and the potential estimate
Knight Frank has conducted a thorough inventory inventory survey in India’s top eight markets to assess the supply scenario that exists in the market. India’s eight primary markets had an estimated 38 million square meters (412 million square feet) of warehouse stock at the end of FY23.
The Mumbai market accounted for 34% of this stock and together with NCR made up 52% of the total stock. Strong transaction volumes, coupled with relatively lower supply in FY23, have reduced vacancy levels to 12.2% over the year. Vacancy rates in key markets of Mumbai, NCR, Bengaluru, Pune and NCR have fallen significantly compared to the previous year.
Demand on the secondary market is rising
Knight Frank’s report goes beyond the top eight Indian markets and also delves into the storage transaction volume performance of 13 secondary markets. The share of secondary markets in the total number of transactions recorded in the country has grown consistently from just 11% in FY 2019 to 21% in FY 2023. These markets recorded a 15% year-over-year increase in annual storage transaction volumes of 11.98 million square feet in FY22 to 13.75 sq ft in FY23.
Lucknow led in terms of annual transaction volumes with nearly 2 million square feet and Visakhapatnam experienced the highest growth at 265% in FY23. The fact that transaction volumes in these secondary markets grew by 15% year-over-year in FY 2023, while demand in the eight primary markets remained stable year-over-year, underscores the increasing traction in these emerging storage markets.