The Global Outsourcing of Warehousing

Technology has revolutionized the way many companies optimize their logistics operations, with further progress ahead. From inventory management systems, to robotics and automation within a warehouse or fulfillment center, these systems help improve efficiencies, reduce costs and enhance the visibility of products as they move through the supply chain—making the investment in new technology invaluable to occupiers. While major retailers are better known for using logistics technology in the supply chain, especially in warehouses, 3PLs are one of the fastest-growing users of logisitics technology. As a result, 3PLs are a major occupier of newly constructed industrial space because of their need for more power to accommodate increased storage requirements and modern building designs. We expect this to continue in the coming quarters as 3PLs have historically been the top occupier of first-generation space.

4PLs: The New Frontier

The rise of 4PL providers is a growing supply chain industry trend. Instead of focusing on specific logistics tasks or functions, 4PLs take on a more strategic role in managing a broader portion of a company’s supply chain network. This requires managing other 3PL providers: transportation, warehousing, inventory management and distribution. 4PLs leverage advanced technology such as artificial intelligence (AI), big data analytics and blockchain to optimize entire supply chain ecosystems.

AI is an emerging trend within logistics networks. AI algorithms can predict demand patterns, optimize product routing and transportation, generate highly accurate forecasts and automate the decision-making process. As occupiers adopt this new technology, 4PLs will become more attractive as they act as a central hub that provides end-to-end visibility, collaboration and decision-making capabilities that transcend traditional logistics boundaries. This technological innovation is poised to revolutionize the logistics landscape and distribution center requirements.

Reverse Logistics

The volume of returned items increases relative to the growth of retail sales, particularly for e-commerce. Many occupiers, especially e-commerce companies, contract a 3PL for reverse logistics largely due to the time and handling costs required to address this. 3PLs can also manage the item disposition process, which is the determination of what to do with each returned item: place it back in inventory, sell it as used, sell it to a discount chain, fix or refurbish, dispose of it, etc. This decision process becomes more complex relative to a company’s product variety.

The growth of e-commerce and the reliance on 3PLs have significant implications for global industrial real estate markets. The need for more warehousing and distribution space has surged in recent years, particularly in regions where e-commerce and logistics hubs are concentrated.

Although 3PLs have operated for decades, they have captured over 30% of the U.S.’s bulk leasing activity (over 100,000 sq. ft.) since the pandemic’s onset because the explosive growth of e-commerce spurred significantly more warehouse space demand. 3PL usage is projected to remain strong as this trend continues, highlighting the importance of 3PLs for today’s supply chains. However, recent economic uncertainty resulted in softening short-term 3PL demand and a drop in overall market share, as both digital and brick-and-mortar retailers and wholesalers held off on expansion.

Figure 1: US Bulk Occupier Leasing by Industry 2022 vs. 2023

We expect 3PL warehouse demand in the U.S. to match the 2023 level this year, and future growth is likely. Occupiers’ needs for modern warehouse space will grow as 3PLs expand their capabilities and morph into 4PLs to service growing online consumption.

Figure 2: US Bulk 3PL Leasing by Quarter

E-commerce accounted for 23% of retail activity in Q4 2023, compared to the previous record of 22.8% in Q2 2020. It has grown steadily since 2020 and we expect this to continue over the next decade as millennials and Gen-Z gain more purchasing power. This will lead to increased 3PL utilization and demand for warehouse space, as will the need for more inventory closer to the consumer, modern technology to service these consumers, and the need to handle increasing reverse logistics.

Figure 3: US E-Commerce History and Outlook

3PLs are one of the largest sources of European logistics take-up since 2019, largely utilizing XXL facilities, but the bulk of increasing market share gains over the past 12 months have been in smaller facilities. This trend toward smaller facilities—seen across all occupier types but especially 3PLs—is the result of global economic uncertainty.

Figure 4: European Online Retail Sales and E-Commerce Penetration

In contrast, some occupiers, like manufacturers and retailers (particularly supermarkets), are self-leasing XXL facilities to control the warehouse lease, although a 3PL often operates the facility. This offers flexibility to change a 3PL provider or self-manage without needing to locate a new XXL facility, which are crucial to their businesses and scarce. Additionally, self-leasing enables final occupiers to potentially obtain better terms, which 3PLs are not always incentivized to do. We expect the use of 3PLs for facility operations to continue increasing.

Figure 5: European 3PL Share of Take-Up

Figure 6: European Deals by Size Range (2023)

Leasing requirements from 3PLs remained relatively healthy in 2023 despite logistics leasing momentum moderating from its pandemic peak. 3PLs accounted for about half of regional leasing activity in 2023, cushioning the recent sluggishness from major e-commerce platforms. In Australia, 3PLs accounted for almost 60% of the gross take-up in 2023. Many logistics occupiers are leveraging 3PLs for warehouse and distribution center fulfillment so they can focus on structural reviews and supply chain network transformation.

Figure 7: 3PL Share of Total Logistics Leasing Activity in Select Asia-Pacific Markets

We anticipate continued growth in 3PL market share, as rising consumer demand and increasingly complex fulfillment operations accelerate outsourcing. Eighty-seven percent of respondents from the 2023 Asia Pacific Logistics Occupier Survey intend to outsource the same or more logistics operations volume to 3PLs. Most respondents identified improving operational efficiency as their main reason for utilizing 3PLs. The second-most common reason was budget control and cost-savings. When there are economic headwinds, companies can use 3PLs to avoid large capital investments while still optimizing distribution capabilities in peak and low seasons.

Some survey responses varied by geography. Mainland Chinese respondents ranked budget concerns as being equally as important as improvements to operational efficiency, primarily due to their conservative business outlook. In contrast, occupiers in Australia, New Zealand and Singapore reported an ongoing preference for 3PLs’ distribution networks to mitigate tight logistics supply.

Figure 8: Asia Pacific Logistics Occupier Survey

Figure 9: Asia-Pacific Online Retail Sales and E-Commerce Penetration

3PLs have become indispensable in today's complex and dynamic supply chains. They help businesses navigate the increasing intricacies of modern logistics, providing a wide array of services that include warehousing, transportation, inventory management and more. 3PLs enable companies to optimize their operations, enhance customer service and gain a competitive edge. By outsourcing logistics to these specialized providers, businesses can focus on their core competencies, achieve cost efficiencies and leverage cutting-edge supply chain technology. We expect 3PLs to drive demand for industrial & logistics space globally for the foreseeable future, particularly as they increase their use of automation technology to service growing e-commerce-focused business.