The line between retail and logistics is blurring

The demarcation between retail and logistics is eroding and will impact future real estate decisions, writes James Markby, managing director of Logistics Capital Partners

Fifteen years of my career have been spent as a logistics real estate specialist, but in the last three a change has happened – we’re also developing more buildings for retailers. Our recent JV with Eurofund, a European shopping center developer and manager, is a deliberate strategy to blend retail and logistics specialisms.

Logical logistics

Some constant factors explain retailer’s growing requirement for logistics space: customers are buying more, e-commerce links them to the global marketplace, they demand products at lower cost and they seek faster delivery. Retailers must provide a service that meets their needs, ensuring customers keep coming back.

E-commerce is changing how retailers use physical space. More business can now be done directly from the warehouse rather than the store. However, there is an undersupply of real estate serving retailers’ logistics needs across Europe, but this offers up opportunities for developers, managers and investors.

Learning curve

James Markby, Logistics Capital Partners

Real estate investors’ understanding of the specific use, design and operations of logistics buildings is evolving. The yield gap between the retail and logistics sectors has narrowed and in many instances inverted. However, the traditional view of what constitutes ‘institutional logistics’ is not necessarily the benchmark for future success. Having a regular building shape and being close to population and infrastructure are basic metrics, but this is not necessarily enough to predicate outperformance. Rather, there is a much wider matrix of complex needs for retail success that the real estate sector is now trying to satisfy.

Development challenges

To deliver more goods to more customers across more countries, faster and for lower cost, more inventory is required. Further, more staff and operations are needed within buildings. Accommodating these factors present several practical and economic issues that also impact efficiency and performance. Bigger buildings are a prerequisite and this requires more land, access to labor, vehicle movements of trucks and cars for changing shift workers, which could be several thousand per day, necessary amenities, infrastructure, taxes, permits and regulations that then govern a successful operation and building. These elements interact and play a much bigger part in retailers’ business planning than perhaps traditionally acknowledged in the retail sector or indeed the logistics sector.

A good illustration would be to compare a standard logistics building’s interior use, which is almost exclusively used for the storage of goods, with a new e-commerce fulfilment center where approximately only half is used for storage, while the other half is used for related processes and operations to drive efficiency of the supply chain and customer experience. This alone means a building needs to be twice the size compared to a traditional model. Externally, significantly more yard areas (land) is required to accommodate the people and vehicles coming to the building. Trying to find and deliver large feasible sites that provide these factors is tough, but each is critical.

Undoubtedly, we are witnessing part of a new global industrial revolution, one that is less constrained by traditional boundaries and silos. One final thought, LCP has already developed approximately 3.5 million square feet so far for retailers with a further three million square feet planned to start this year. One wonders if this is potentially more than many pure retail developers are delivering for retailers?