Urban, or ‘last mile’, logistics is among the emerging real estate sub-sectors that lenders are learning to underwrite. However, sponsors say it remains difficult to access. Here, in extracts from an article first published by sister title PERE, real estate advisors and those on the equity side of the business share their thoughts:
E-commerce is one of the defining economic trends of the era, and it is driving a voracious demand for last-mile logistics. “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 consultancy CBRE. “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 competing uses.
Within that dilemma lies part of the key to its solution, argues Marcus de Minckwitz, director of the omnichannel group at consultant 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 labour. 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. “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,” says Chris Caton, global head of research at logistics platform Prologis.
For big investors like Allianz Real Estate this is “a difficult segment to source,” admits the company’s 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.”
CBRE Global Investors has tended to access the asset class by acquiring larger facilities that lie outside urban areas but are nonetheless close enough to deliver goods into cities, says head of EMEA logistics, Philip Dunne. “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.”
As logistics values rise and retail values fall, underutilised 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.
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. However, Caton describes the repurposing of retail sites as “very rifle-shot situations” that only emerge where retail is situated close to distribution corridors. Instead, he believes the dominant trend will be the redevelopment and intensification of existing industrial areas.
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.”
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