Focusing on the final mile piece of the puzzle

Increasing sophistication in industrial and logistics real estate means investors have a plethora of sub-sectors to choose from, each with its own characteristics. Last-mile logistics is quickly gaining popularity as it taps into urbanization trends and the need for efficient deliveries.

Last-mile logistics facilities are critical to third-party logistics companies, e-commerce platforms and other retailers. The so-called ‘last mile’ is the final journey for goods to their intended destination – it may, of course, be more or less than a mile. The destination could be the home of a consumer or business, or perhaps a pick-up/drop off location such as a brick-and-mortar shop or locker banks.

One of the reasons the last mile is arguably the most important part of the supply chain is that it is the most expensive, making up 41 percent of the total costs of the journey, according to research from Deloitte and Chinese logistics firm Cainiao. Meanwhile, a 2022 report from the Clean Mobility Collective, an environmental group, found the last mile accounted for up to half of the total greenhouse gas emissions from a package’s journey, meaning it is a key area for logistics firms seeking to reduce their carbon footprint.

Demand drivers

Demand for delivery services began to rise with the advent of e-commerce, spiked during the pandemic and has since returned to pre-covid growth trends. E-commerce penetration continues to rise for both B2B and B2C transactions and customers are also becoming more demanding. More and more retailers offer next-day or same-day delivery.

Another important part of the last mile picture is the reverse journey from customer to seller; e-commerce platform Shopify estimates that 20-30 percent of goods sold online are returned.

Andrew Allen, global head of research, product strategy and development at Savills Investment Management, says: “Continued urbanization in cities all over the world means rising populations, and therefore demand. At the same time, the stock of industrial land tends to get eaten up by other, more valuable uses – more often than not, residential. Added to this, older industrial buildings are often not suitable for modern tenants. All these factors are positive for last-mile logistics.”

Furthermore, demand for specialized last-mile facilities would rise even if e-commerce demand slowed, notes Mike Best, head of logistics at UK REIT British Land, which is developing last-mile facilities in London. He says that if the demand for delivery stayed exactly as it is today, we would still have demand for last-mile facilities because occupiers need to improve the efficiency of their supply chains and move to better located, more efficient space to help drive delivery costs down.

The concept of a last-mile logistics facility is simple: goods enter on trucks from a large distribution warehouse and are transferred to other vehicles, which could be smaller trucks, cargo vans or even bicycles, for the final journey to the delivery point. However, this simplified description covers the need for sophisticated systems to maximize efficiency.

Proximity to the customer is the crucial location consideration but varies depending on location and transport networks. Local policies on traffic and noise can also be complicating factors for operators. Scarcity of land in the most populous cities means an increasing number of multi-story warehouses, which can cost twice as much to build. Such facilities have been built for decades in Asia but are now appearing in the US and Europe.

Best says: “With last-mile logistics, whether the occupier is an e-commerce company, a 3PL or a retailer, they are all using this real estate for the same function. The last mile is the most expensive part of the delivery journey for an occupier and the most difficult problem to solve.”

Reducing emissions

Last-mile logistics real estate owners are trying to deliver buildings in the right places, which will make occupiers more efficient by making those journeys more efficient, Best adds. “As well as the cost aspect, there is also a sustainability aspect. Assets closer to the final point of delivery can help accelerate the transition to low-carbon vehicles, such as cargo bikes or electric vans.”

Rents for last-mile space tend to be much higher than for other logistics space – around three times as much – although this varies from market to market. However, last-mile facilities tend to be much smaller.

“The push to reduce that last-mile distance means using more, smaller facilities,” explains Best. “The relative cost of the warehousing reflects the fact that delivery cost is so skewed by the last mile.”

As in other real estate sectors, demand is highest for properties offering the best modern, purpose-built and sustainable space.

“Tenants will be prepared to pay a premium for modern space close to their customers because the efficiencies they get from a modern, well-located building will outweigh higher rents,” says Allen.

Sustainability considerations are becoming more and more important for logistics occupiers. For example, DHL and UPS have pledged to be net-zero carbon by 2050, while Amazon has declared it will hit net-zero targets in 2040. Reducing the carbon emissions from last-mile logistics operations will be important in their efforts and more efficient, well-located facilities can help. A study by British Land and University College London argues that logistics ‘micro-hubs’ in city centers could lead to carbon savings of 55-90 percent per parcel.

Electric or low-emission vehicles will be an important part of the drive to reduce emissions but will also be a complicating factor for last-mile facilities, which may need to offer charging and parking space for EVs. This is likely to drive more multi-story locations.

Another ESG factor is the welfare of drivers and other staff. Logistics occupiers favor assets that offer better facilities and a nicer working environment for on-site staff and drivers.

Everywhere in the world where goods make that final journey has demand for last-mile logistics. However, demand is naturally greatest in large and growing cities. Asia-Pacific markets such as China and Japan have seen the development of sophisticated multi-level space, but specialized last-mile facilities are also being developed in Europe and the US.

“Asia has been the template for everybody to look at, because it is the most advanced in dense, multi-story facilities, but we are also keeping an eye on other major cities as this trend is being repeated in major European and US cities,” says Best.

Development and investment

The tight supply of urban industrial land means investment managers and developers are looking for opportunities to reuse or redevelop existing buildings. In the US, a number of retailers plan to adapt or add to retail store space in order to facilitate shipping from those existing locations, effectively turning shops into fulfilment centers.

For example, pharmacy Walgreens Boots Alliance announced last year that it will use its 8,700 stores as delivery hubs as well as retail outlets. Retail staff will pick and pack items for home delivery via third-party shippers. In Australia, HML Capital has launched a Last Mile Logistics Fund that plans to acquire traditional retail properties which can be repositioned to provide last-mile solutions for non-discretionary retailers.

“Tenants will be prepared to pay a premium for modern space close to their customers because the efficiencies they get from a modern, well-located building will outweigh higher rents”

Andrew Allen
Savills IM

However, Brewster Smith, senior vice-president, supply chain solutions at Colliers International, says: “Most legacy retail locations are not designed or built for this type of incremental step change in volume or processing capacity. As a result, the implementation of a ship-from-store operating strategy is by no means a plug-and-play decision.”

Allen points out that, in general, “it’s not so much an opportunity to convert existing buildings to last-mile logistics, but to redevelop them to provide the modern specialist space occupiers need.”

Developers need to be creative to find suitable infill space in crowded cities. British Land is building a 120,000-square-foot “microhub” under one of the office buildings it developed at Paddington Central in London. Meanwhile, Goodman Group is developing an 11-story facility on the site of a former car dealership and gas station in Queens in New York City.

Last-mile logistics real estate has sparked interest from real estate investors all over the world and led to the creation of several specialist platforms and strategies. Blackstone Group was an early adopter in 2019 when it launched Mileway, a pan-European, last-mile logistics real estate company with a goal of owning and operating 1,000 last-mile logistics facilities previously acquired by Blackstone funds.

Other specialist platforms include Metropolitan, a €1.5 billion European last-mile logistics platform launched last year by ICG Real Estate, and Voyage, a joint venture between alternatives investor King Street and London-based logistics specialist Bowery that manages 10 last-mile assets in France, Germany and the Netherlands. Hong Kong-based PAG and Ivanhoe Cambridge launched a Japanese urban logistics fund in 2021.

Some investors and managers are targeting the sector as part of a broader urban industrial strategy. Savills IM’s EULIF fund is targeting urban logistics and light industrial properties, and large sector specialists such as ESR and GLP are also developing last-mile facilities.

The demands of ever-greater efficiency are driving technological advances in last-mile logistics, including the use of drones and driverless vehicles. Drone delivery schemes have already been launched in China and Japan and are being tested elsewhere.

While these developments are exciting for the industry, technology might also change occupier requirements in future. “There is a risk that, due to the specialized nature of the buildings, they may suffer early obsolescence as logistics technology advances,” says Allen.