‘Last mile’ urban logistics units – distribution facilities within or close to cities that are used to store and ready goods for customer delivery – are really benefiting from the boom in online retail. Demand for these units is increasingly rapidly, simply because distribution occupiers need to be close to consumers, who want to receive their goods more quickly than ever before. At the same time, the amount of land available for such facilities is diminishing due to the swift expansion of Europe’s cities. Urban logistics is experiencing strong rental growth in the UK, and Continental Europe is becoming part of the success story too.
Online retail drives strong urban logistics demand
There has been a rapid expansion of online retailing in the UK, which is one of the most advanced online retail markets in the world. This is creating strong demand for urban logistic facilities. Consumers are demanding same-day or next-day delivery times, whereas a few years ago four or five days would have been the norm. Parcel delivery volumes have doubled in the UK in the last six years due to the growth of online retailing. This forces logistics occupiers to be close to consumers in major cities to ensure speedy delivery.
…retailers and e-commerce companies are investing heavily into urban logistics and spending less on, or in some cases closing, high street stores.
As a consequence, retailers and e-commerce companies are investing heavily into urban logistics and spending less on, or in some cases closing, high street stores. We argue that the ‘shed’ is replacing the shop. Online retail business models are typically space-hungry too. Estimates from logistics developer Prologis indicate that online retail requires approximately three times the logistics space of traditional retailing; this reflects a need not only for delivery, but for management of returned goods too.
At the same time, the major urban areas of the UK are growing rapidly. For example, London is growing by 1 million people per decade, creating further demand.
Declining land availability, primarily due to residential redevelopment
Although cities are growing rapidly, new development is constrained by planning policies such as Green Belts around cities. There are often severe housing shortages in such cities and values for alternative uses such as residential properties are also commonly higher than for logistics units. So, vacant land and existing logistics units tend to be redeveloped as housing. According to the Greater London Assembly (GLA), the amount of industrial land in London has fallen by 16% in just 15 years, just as the demand for that space is growing from a new wave of occupiers.
Strong rental growth for urban logistics units
For property investors, this strong demand and constrained supply means that strong rental growth is taking place. Our analysis of Costar records for Greater London’s logistics uses shows that rents (having been largely flat to 2013), have increased rapidly in line with growing e-commerce, moving from £8 per square foot (psf) to £12psf currently.
Europe is set to follow the UK’s example
What we have witnessed in the UK is now happening in Europe. Online retailing is a little less advanced in Europe compared to the UK, but it is changing quickly. In 2016, it grew at a faster rate in Europe than the UK a trend expected to be maintained for at least the next five years. This is being driven by several factors: first, the rapid expansion of major online retailers such as Zalando, ASOS, Amazon and others; and second, consumers are becoming increasingly confident in buying online due to wider availability, faster broadband, more mobile devices and simpler payment systems, which in turn is driving yet more online retail growth. Furthermore, major European cities are growing at least as fast as London has been, and they are also experiencing the same shortages of developable land for urban logistics. This makes investment in the sector look appealing.
Trends set to continue and intensify, especially in Europe
Overall, the trends in the logistics sector are set to intensify, and this supports value and growth in urban logistics. There will be no let-up in population growth in major cities and online retail will continue to expand its requirements for urban logistics units. We are becoming increasingly used to seeing Amazon deliveries and the vans of parcel delivery operators such as DPD shuttling around city streets. But this is balanced against a diminishing supply of land for logistics development in major cities. Rental growth should continue to be strong for property investors. As such, it’s always worth going the ‘last mile’, thanks to the logic of urban logistics.