Industry experts consider that e-commerce now accounts for more than one quarter of all retail sales in the UK, and this number is expected to reach close to one-third of all sales by 2024.

An increasingly sophisticated consumer is now expecting same day or overnight deliveries, cheap delivery pricing, a world-class user experience and a seamless returns procedure.  Amazon, aspiring to their company vision of being the ‘earth’s most customer-centric company’ is setting the bar high for this and is ploughing millions into ensuring they lead the field.

What this means, and has meant for several years, is that logistics is big business. And big business needs big properties – both in size and number.

Indeed, changing customer habits have had a well-documented effect on the bricks and mortar retail industry with many retailers pre-Covid being slow to adjust to the “new world”. Retailers must now adapt quickly and adopt a joined up “clicks and mortar” strategy which could mean using their store networks to service their last mile logistics and integrating their operations to make a best-in-class customer experience.  This, in itself, is having an effect on the real estate industry as store sizes and requirements will need to be flexed to satisfy the individual requirements of different retailers.

The thirst for logistics space has, of course, exponentially increased prices for the real estate that can satisfy these requirements. And of course, logistics space does not only include the national and regional distribution sheds we see on our motorways and major A-roads.  It also includes the “last mile” aspect of logistics – the individual journeys to deliver packages to customer’s homes – which has proven the most challenging (and expensive) for many operations. 

There is an increasingly large demand from e-commerce and third-party logistics companies for warehouse and distribution space in urban areas. In towns and cities where there is little of this space it has pushing rents up significantly and it is estimated that between 30% and 50% of all new industrial developments are now tied to e-commerce fulfilment. The demand for new build facilities now and in the future, according to Savills, amounts to between 70 and 75 million ft² per year and continues to exceed the available supply by far.  These are huge numbers! 

Unlike many other property sectors, the COVID-19 pandemic has had a hugely positive impact on demand in the sector. According to Lambert Smith Hampton (LSH) over 6,000,000 ft.² of take-up was linked to COVID-19 ‘contingency measures’ such as the distribution of PPE, and consumers’ increased reliance on online shopping during this period, which has encouraged many e-commerce operators to push ahead with their expansion plans.

Many logistics operators and e-commerce organisations are looking for long leases on their operational properties, bucking the general trend in the real estate industry for shortening lease lengths.  As always in property, supply and demand pay a massive role in property pricing and, according to Lambert Smith Hampton, strong investor demand pushed prime logistics yields to hit new records in 2020.  Long leased warehouses in the South-East are now obtaining circa 3.75% prime yields, with the expectation that these are going even lower this year. Prime land values increased by an average of 17% in the locations monitored by LSH and some markets saw ‘extraordinary’ growth – for example, they cite that Leicester’s land values soared by 50%, and Thurrock by 36%. This trend is expected to continue into 2021, and beyond.

In addition, the relative lack of supply of space in this sector has supported continued rental increases.  The average increase in prime rents for large units has been estimated between 4% to 6% per annum in recent years. As new stock comes to the market this will ease supply pressures, but these types of rental increases are extremely difficult to find in any other real estate sectors at present.

The purpose of the last mile delivery aspect of the logistics industry is to ensure that an item is transported to its recipient in the quickest and most cost-efficient way possible and is the most expensive part of the supply chain. The market is continuously evolving and, with this, customers’ expectations are increasing exponentially.

Last mile delivery accounts for more than 53% of the total shipping cost. There are various reasons for this: very often you are not sending in bulk but sending individual items to a single location. Hence, delivery drivers carry many small packages each with unique destinations. More stops mean more complex routes, more idle time and more time travelling between destinations.

Given the concentration of population, income, and spending into urban areas, these are obviously the principal destinations for online deliveries to customers. Last mile delivery depots are, by their very nature, closer to the customer who tends to be located in these urban locations, which have higher land values.  There is more congestion meaning slower delivery times, and there are high costs to enter some towns and cities – such as congestion charges. E-commerce organisations also face very high fixed costs, especially in urban areas, which do not have the ability to flex in accordance with changing customer demands.

Logistics buildings very often may not be the highest value use within city centres (although that is changing in some locations) and available land may therefore be diverted to other uses such as residential development.  Whilst the size of last mile buildings may not be on the scale of their regional and national counterparts, they do require a lot of ancillary space including loading areas and significant amounts of parking. Even in secondary cities and suburban locations, town planning restrictions and competing uses make land scarce and expensive.

According to the planning advisors, Litchfield’s, the pace of change in the logistics sector is running ahead of the planning system, with 58% of local authorities viewing the lack of an up-to-date local plan as a key barrier to meeting last mile needs. In my view, this is not uncommon across the industrial sector, which is demanding more space as a result of some of the key trends occurring in the UK market.   Many local plans are out of date and do not cater to this overall growth of demand.

It goes without saying that the imbalance between supply and demand in urban areas is a major challenge for logistic operators as the tenants of properties but provides massive opportunities for real estate developers and investors.

This is forcing real estate developers and e-commerce organisations to become increasingly inventive with their solutions for cracking this problem. These include multi story logistics operations in urban areas, examples of which include Prologis’s proposed development in east London and European proposals in Hamburg, Munich and Paris. SEGRO, currently the largest industrial REIT in the UK, is getting even more creative by building an 800,000 ft.² underground logistics centre in central Paris.

There is no doubt that innovation is required in the sector in order to make logistics, and especially last mile operations, more efficient and cost-effective. There will undoubtedly be more operational advancements that will evolve over future years with the internet being the basis for more “smart” warehouses and logistics. Automation is most definitely the name of the game in this industry. 

A future opportunity for property investors and developers could be the provision of more “on demand” warehousing, according to JLL. This type of model could cater for the expanding demand from logistics and e-commerce businesses for flexible space, with operators paying per use of the warehouse facilities. Regulation is currently limiting the use of delivery drones and driverless vehicles so, in the short term, innovation will be around real estate and operations.  This sector is ripe for innovation and those real estate developers that ‘crack it’ will obtain the rewards for doing so. 

As with all sectors of real estate, sustainability is a growing agenda and, according to JLL, the sustainability agenda will drive big changes in the design and specification of warehouses. Logistics transport is the main contributor to emissions and expect to see an increase in electric vehicle deliveries in the future.   But the warehouses themselves also play their part. Increasingly institutional investors are demonstrating a tendency to be more likely to fund “green” buildings. JLL anticipate an increasing demand for “green” warehouses as major companies make commitments on carbon emissions and this increasingly becomes a key agenda item for governments. 

Net carbon neutral buildings can be classified as such via a “whole life” approach.   This includes everything from building construction, the operation of the building (heating lighting and appliances, plus maintenance, repairs and water use); end of life (demolition waste and disposal) and beyond end of life (carbon savings from material reuse). Those who adopt green buildings will most definitely obtain an early competitive advantage.

Whilst logistics has been seen as the preserve of the large institutional investors, and this is certainly true of the regional and national distribution warehouses, there are opportunities for SME developers and investors in the last mile market., Although there will still be a requirement for relatively deep pockets, the demand is such that pre-lets with blue chip tenants and forward funding deals with institutional investors should be achievable.