Much of the discussion about China’s logistics market revolves around what will lead growth in demand for Grade A warehouses. Will the firms that traditionally fuel demand keep expanding, or companies in new emerging sectors create new Grade A demand of their own? Meanwhile, the potential of opportunities from firms upgrading from non-Grade A warehouses is also worth considering.

Most of China’s warehouse sector is dominated by non-Grade A properties. Estimates from the China Association of Warehousing and Distribution put China’s entire warehousing stock at just over 1 billion sqm in 2018. At that time, we tracked about 51 million sqm of mostly for-lease Grade A stock in the leading 24 markets, and found that it accounted for just 4.8% of the total. Even allowing Grade A buildings that are in other cities or are built for self-use purposes (and not included in our total), the evidence strongly indicates that Grade A-quality buildings account for only a fraction of China’s entire warehousing space.

Tenants occupying China’s vast landscape of sub-Grade A warehouses represent a huge potential market for upgrading. They provide a ready source of demand for new Grade A projects. Increasingly sophisticated consumers are expecting ever-faster omnichannel delivery. Consequently, retailers, e-commerce companies, and logistics firms face pressure to boost their supply chains’ efficiency. Lower-end facilities can drag down tenants’ efficiency, such as when limited access around buildings can prevent smooth movement of commercial vehicles. Many tenants, seeking to keep pace with imperatives for agile distribution, are expected to be willing to pay for the benefits of Grade A properties.

Thus, while many occupiers will be ‘pulled’ to the benefits of Grade A properties, circumstances may ‘push’ others to consider upgrading. Local governments have begun marking legacy warehouse parks for demolition and redevelopment. Affected tenants face a choice: while cost concerns may lead some to relocate to other non-Grade A warehouses, others will choose to pay a premium to remain in a similar location with the added benefit of Grade A specifications.

JLL recently surveyed developers and tenants in China, who support the view that the demand for upgrading will help drive take-up in Grade A spaces. Approximately four-fifths of developers surveyed picked upgrading as one of the market’s top emerging drivers of demand. Similarly, a large majority of surveyed tenants expressed plans to upgrade from legacy to Grade A space over either the short or mid-term.

The COVID-19 outbreak will slow down, but not stop, the trend of tenants relocating to Grade A properties. The outbreak has already underlined the importance of efficient distribution. Millions of households have turned to fresh food delivery firms for groceries and other basic needs during  lockdown. More importantly, the long-term trend of China’s logistics and warehousing sector still points to a steady adoption of Grade A buildings as key to staying ahead in a competitive distribution landscape.

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