The logistics sector has been running hot for some time now. Simply put, e-commerce has transformed the sector from brown ale to champagne in less than a decade. Across Europe, investor interest is running high, yields are compressing and in many cases the sector has been a serial outperformer.
However, as prices have increased, the ubiquity of outperformance is by no means guaranteed. Indeed, there are already clear signs of divergence between different locations and different sub-sectors.
Looking forward, this spread in performance is only likely to grow as occupiers and investors target assets most suited to serve, and serve quickly, the needs of an ever-demanding consumer. As such, strong performance is expected from facilities serving major urban areas, particularly direct to consumer delivery.
Facilitating this is both changing consumer habits, as well as continued technological change. While online sales continue to grow apace, the desire for ever quicker delivery is predicted to surge over the next decade. In 2016, management consultant McKinsey forecast that this type of ‘on demand’ delivery in the US will grow from less than one percent of total parcel revenues in 2016 to around 20 percent by 2025.
In time, the importance of speed of delivery will outweigh cost – particularly as technological improvements such as big data optimization of the supply chain, automation and the roll out of electric and autonomous vehicles reduce operating costs. In this environment, we should talk more of ‘last hour’ rather than ‘last mile’ logistics.
In gateway cities such as London and Paris, there may be little difference between the last hour and the last mile, but often the difference can be stark. In most cities, while occupiers can take multiple smaller units to service the entire city, they’re at risk of being inefficient and costly.
However, larger cross-docked facilities in intra-urban locations can solve this conundrum. And as such, this type of last hour logistics facility will increasingly catch the attention of both occupiers and investors. A good example of such a scheme is the Omega hub in Warrington in the north-west of England. From here Manchester, Liverpool and the towns of Lancashire and Cheshire are easily reachable within an hour’s drive, serving a population in excess of five million.
Places like Warrington should continue to grow in profile given the ability to serve a large population catchment, for both distribution and customer delivery. The trend will be replicated across Europe. Indeed, locations across the Rhine Ruhr in Germany and Randstad in the Netherlands already display many of the characteristics of last hour logistics.
Last hour’s early days
For investors, last hour facilities offer a number of attractive characteristics. There is unlikely to be a shortage of occupier demand. In Warrington, for example, the likes of Hermes and Asda have taken space while further east Logistics North in Bolton has attracted Amazon and Whistl. In such locations, accessibility and lower occupancy costs play a crucial determining role. These locations are dual-purpose, serving customer deliveries as well as stores, broadening the profile of occupier.
While land availability may pose a risk to rental growth, for the best-connected sites there is still rental pressure as occupiers compete for the most efficient locations. And with rents more often than not starting from a lower base than traditional corridor locations, there is room for outperformance. With solid long-term demand fundamentals, the best locations are likely to gain from further investor interest, weighing on today’s yield premium.
In sum, with above average rent growth and a shrinking of today’s yield premium, a future of sustained outperformance appears likely. But as with all new strategies, the question is always one of how to get access. There is a wide range of European locations where this strategy is likely to work, and whereas small unit sizes are invariably a stumbling block when looking at traditional urban logistics assets, average lot sizes of these facilities is larger and more suited to institutional investors than last mile facilities.
We are in the first hour of this investment opportunity and the long-term drivers of success look compelling.