Passing on higher energy costs can reduce the impact of the energy crisis for industrial and logistics occupiers
Savills research, with supply chain consultancy Hatmill, shows that for our sample of warehouse occupiers, costs related to utilities range between 2 to 4% of the total operational costs, whilst the combined costs of transportation and labour reflect more than 75% of the total costs. This implies that higher energy prices will impact the logistic operators to a minimum extent. For instance, in an extreme scenario of utility bills doubling, the utility bills will still be less than 10% of the total costs.
Many commentators argue that 3PL (third-party logistics) companies operate on low profit margins, and therefore, any price increase, such as energy prices, will affect their overall profit margins and balance sheet. However, many 3PL services are negotiated as an open book contract, meaning that any cost increases can be passed on to their end customer, which ultimately can then be passed to the consumer.
Higher energy prices will impact logistic operators to a minimum extent. For instance and in an extreme scenario of utility bills doubling, the utility bills will still be less than 10% of the total costsBram de Rijk, European Research Associate, Commercial Research
Other types of warehouse occupiers, such as manufacturers and companies on the cold chain, are more directly impacted by higher energy bills as their operations often require more energy. Eurostat data highlights the heavy energy usage of industrial operations as industry accounts for 26.1% of the total energy consumption in the EU in 2020. Where transportation costs are the main cost for retailers and parcel operators, the main costs for manufacturing and construction occupiers are more related to operational costs such as labour and energy.
The industrial sector is, however, more shielded from higher energy bills compared to other types of commercial real estate, as occupiers can pass higher energy costs easier on to their end consumers. These consumers are either individuals who are more capable and willing to pay higher delivery costs to get their purchases faster-delivered to their homes (relatable to occupiers in transportation and storage industries), or businesses doing business with other businesses (B2B), e.g. occupiers in manufacturing and construction.
Passing on higher energy costs by manufacturers is reflected in the industrial price index published by Eurostat. The index shows that as of May 2020, the industrial producer prices started to increase. The price increase accelerated during the last months of 2021 and the first months of 2022. Between May 2020 and March 2022, the index level of the total industrial producer price index increased by more than one-third.
Where the breakdown of the producer prices shows that pricing remained relatively stable for most items, the producer prices for energy increased significantly. The producer price for energy soared by more than 150% since May 2020 and contributed to unprecedented increases in the overall producer prices since May 2020. For construction prices, a similar trend is witnessed. Within just one and a half years (Q1 2021 to Q2 2022), construction costs increased by more than 16.5% and output prices for construction by 14%, particularly driven by increasing costs for input materials.
The industrial and logistics sector has, therefore, a relatively strong resilience to the energy crisis. Logistics operators are most resilient to higher energy prices due to the energy costs reflecting a small share of the total costs and their ability to pass rising energy costs to end consumers relatively easily. Occupiers in the manufacturing and construction industries that are more energy-consumptive are more exposed to higher energy costs but can mitigate this by adjusting their producer prices to pass on higher energy costs to customers.
Read the articles within Spotlight: The impact of the energy crisis on commercial real estate in Europe below.