E-commerce is one of the defining economic trends of the era, and it is driving a voracious demand for last-mile logistics. “We are having an urban logistics boom,” says Tim Wang, head of investment research at Clarion Partners, which manages 170 million square feet of logistics space in the US. “Consumer expectations of faster delivery are getting pampered by e-commerce companies like Amazon. As a result, everybody wants their warehouse to be closer to the end consumer, as well as a larger pool of labor.”
And where occupiers go, real estate investors will follow. “Investor appetite for last-mile is unquestionably the most intense expression of appetite for any sub-class within the logistics sector,” says Jack Cox, head of EMEA industrial and logistics capital markets at CBRE. “It is the white heat of the flame and there are good reasons for that. Logistics assets located within and around the urban curtilage outperform in rental growth and total return large format logistics assets in more distant locations.”
But there is a major obstacle facing both investor and occupier aspirations: land supply. Urban logistics makes most sense in densely populated areas where journeys are slow and proximity to the customer is vital to support fast delivery. In those locations, sites are already scarce, expensive and subject to a number of competing uses, many of which are far more appealing to municipal authorities and surrounding residents than traffic-generating sheds.
“We are seeing lots of developers experimenting and collaborating with occupiers to figure out how they can solve the supply problem”
CBRE Global Investors
Within that dilemma lies a part of the key to its solution, argues Marcus de Minckwitz, director of the omnichannel group at consultants Savills: “Real estate cost as a proportion of total cost in a standard supply chain is only about 5 percent, while the big costs are transport and labor. If you can get a warehouse in a location where you are making big savings on transport, you can afford to pay a much higher rent. That is important because it means that the values for logistics use will compete with other uses in those locations.”
Nonetheless, it is currently very difficult for investors to invest at scale in last-mile property. The viability of the asset class is limited to just a few locations, says Chris Caton, global head of research at logistics platform Prologis: “It is only the top dozen cities in the world that are really qualified for last-touch facilities because they have the density and customer base to demand this kind of solution where occupiers are willing to pay for it.”
Meanwhile, he adds, the scarcity of last-touch property predates the rise of e-commerce by decades. “Logistics real estate development has been focused on delivering the next parcel of land on the periphery of cities, so there is a lack of quality product to support demand. Among our last-touch customers there are e-commerce retailers, but also a whole range of activities that make city life possible, like food and beverage companies, construction materials and furniture goods – there is a wider range of customers for the product type than is appreciated.”
For big investors like Allianz Real Estate this is “a difficult segment to source,” admits European head of business development, Kari Pitkin. “We are looking at urban logistics funds rather than direct investment to get into the last-mile sector, because it is generally smaller investment tickets. An urban logistics facility could be a €10 million ticket, so we need an operating partner to source those kinds of smaller assets. We are still in the process of finding the right manager and we have been evaluating lots of urban logistics strategies, although we do already have exposure by investing with Prologis and Blackstone funds,” she says.
Like many aggregators of logistics property, CBRE Global Investors has tended to access the asset class by acquiring larger facilities which lie outside urban areas, but are nonetheless close enough to deliver goods into cities, says head of EMEA logistics, Philip Dunne. To source inner-city facilities, investors will rely on forming relationships with developers, he suggests. “It is the development sector that will change the landscape first by securing more brownfield land or repurposing existing real estate to develop the product that will support that element of the supply chain. We are seeing lots of developers experimenting and collaborating with occupiers to figure out how they can solve the supply problem.”
As logistics values rise and retail values fall, underutilized retail space would appear to be an obvious target for developers. “With the distress we are seeing in retail the day when that becomes a reality is drawing ever closer,” predicts Cox. “The issue has been the planning risk because of local authorities’ outdated view that logistics does not create jobs and is noisy, dirty and creates congestion.”
Wang says he is aware of six US malls being redeveloped for logistics use. Clarion acquired the Burlington Center mall in New Jersey in 2019 and is working up plans to demolish the existing buildings and replace them with 1.8 million square feet of distribution space. “It will take lots of capital and at least two years to do that, but we really like the location and major e-commerce retailers are willing to pay higher rents for the right locations with access to their end consumers,” he says.
“Major e-commerce retailers are willing to pay higher rents for the right locations with access to their end consumers”
In London, Prologis was among the first developers to buy an existing shopping location with a view to redeveloping it for logistics space, when it purchased a retail park in the northern suburb of Edmonton from M&G Real Estate last year. In the UK capital, the trends that have driven the need for last-mile logistics close to consumers are particularly pronounced, and the city has also seen office and residential land snapped up by logistics developers. In 2019, Prologis bought land adjacent to the Stockley Park suburban office park in west London previously earmarked for office development. It is also planning a “vertical Prologis Park” at Bow Road in east London, within a multi-level historic warehouse building, which will also include media and creative activities and community facilities. Meanwhile, GLP-owned Gazeley is proposing to build a 436,000-square-foot, three-story urban logistics hub on a former housing plot in the city’s Docklands area.
Rifle shot situations
Caton describes repurposing of retail sites as “very rifle shot situations” that only emerge where retail is situated close to distribution corridors, however. Instead, he believes the dominant trend will be the redevelopment and intensification of existing industrial areas. “The classic model will be where a developer replaces an industrial building with a logistics one, or a single-story building with a multi-story one,” he predicts.
While multi-story buildings are common in Japan, Hong Kong and China, they have rarely been developed in Europe or the US, but rocketing land prices and rents are supporting the business case for building higher. “There is a multi-level warehouse being developed right now in Brooklyn and similar developments in Seattle and San Francisco. That is the only way to justify the very high cost of land in some dense urban locations,” says Wang. Meanwhile, London-listed industrial REIT SEGRO has built Paris’s first two-story warehouse Air 2 Logistique, letting it to furniture retailer IKEA and French home improvement chain Leroy Merlin.
“There are reasons why the Japanese model will not cut-and-paste to other markets related to the cost of construction and the size of the trucks, which are smaller there,” says Caton. “I think the Chinese model is more appropriate where you tend to see two or three-story buildings in a wide variety of sizes.”
He cautions investors to give careful thought to their approach to what is still an emerging asset class. “This is a new category and even the logistics operators themselves are still sorting out what they want. Investors will need to be very informed about customers’ priorities, the locations they want and the building features they need, so there is a risk that there will be some challenged strategies.”