Distribution and logistics
Logistics buildings may be seen by many as the hidden class of real estate but with the exponential rise of online shopping and subsequent increase in space needed for distribution and logistics, it has become the asset of choice for many investors.
As the social and environmental impacts of increased freight traffic grow, we ask what is next for the sector and explore whether it can continue to offer the same yields in the future?
Chris Rundle, Real Estate Partner at Trowers & Hamlins and based in Exeter, specialising in commercial property transactions comments "The typical model for retail logistics for towns like Exeter is an industrial park on the outskirts which large HGVs can access from motorways. From that point, a large number of smaller delivery vans are able to complete the 'last mile' of the journey to feed the ever increasing demand for rapid delivery."
"It is a complex and intricate exercise to get the balance right to ensure competitiveness in delivery times without flooding the roads with vehicles."
"For developers and investors, the challenge is to deliver a product that meets the current needs of the sector for location and ultra-efficiency but with a design and on terms that are flexible enough to cater for the inevitable changes that will come in both market-led demand and government regulation."
"From a regional perspective, the Midlands will no doubt continue to be the prime location, but lack of supply in that area and the pressure to meet ever more challenging expectations on speed of delivery are driving some of the largest scale commercial property developments across the regions. Here in the South West that includes Amazon’s planned three-storey 1.25 m sq. ft. warehouse in Avonmouth and permission granted for another 1.2m sq. ft. of logistics and distribution floor space at the second phase of Exeter Gateway."
"In local government there is tension over the rapid rise in the volume and frequency of those last mile deliveries," continues Rundle. "On one hand they are recognised as an essential element in the drive to boost productivity, but at the same time delivery vehicles are seen as among the worst culprits for pollution and congestion, with frequent stops and starts, engines idling and blocking traffic flows. Regional cities like Bristol and Exeter are now being forced to address the same issues that London has grappled with for many years, with plans for Clean Air Zones and congestion charging.
Developers bringing forward plans for new facilities should expect to be asked at planning stage to predict the health costs of vehicle emissions and match that cost with spending on mitigation."
Adrian Leavey, Head of Commercial Real Estate at Trowers & Hamlins thinks "Creative solutions need to be looked at to resolve these issues, like night deliveries for example. There has historically been resistance to HGVs driving around towns and cities at night but a reassessment of this is already taking place, and in the past year we have seen examples like Geodis UK rolling out a programme for one fashion retailer with 33 stores across the country, with deliveries made at night and direct to the shop floor.
Cities like Bristol and London are looking to force the pace of change to electric vehicles, because that would have the double benefit of reducing both pollution and noise, removing one of the main concerns about late night traffic movements. Electric vehicles are an obvious option but only in urban environments as battery life and lack of charging points mean they are not practical in rural communities. Currently though, if all the logistics freight in the UK went electric we would not have the power in the grid to meet the need. Tesla has launched an electric lorry but there is a question as to whether the infrastructure is there to roll that out in a meaningful way."
Leavey continues, "From the industry side, everyone has been caught up in the race for ever faster delivery for fear of losing sales to Amazon, but I believe there is a correction on the horizon once the data is analysed to assess the true cost of meeting that customer demand. 'Elastic is the new lean' is the mantra for logistics, as the industry needs to react as demand goes up and down. This will drive efficiencies in warehousing such as automation, AI and robotics in storage management."
"Again, flexibility is the key, not only in design, but also with a recognition that standard lease terms may need to be revisited to provide a clear and manageable framework for operators to be able to react quickly and effectively to changes in the size and nature of delivery vehicles, technological advances in stock management and the opportunities to enhance profitability by site sharing to utilise vacant space."
Land for warehousing is traditionally seen as being relatively friendly to being placed next to residential, so there is flexibility in terms of where warehouses can be located.
"Warehouses can be conveniently sandwiched between housing and motorways or major arterial routes," explains Leavey. "We’re also likely to see more densification or 'double stacking' of warehouses as pressure mounts on them to be more efficient and increase capacity."
"We are also seeing logistics space coming into the equation within mixed-use use schemes. If you’re planning at scale it makes sense to have a planned solution to how deliveries arrive and are distributed."
"There are some interesting environmental issues around sheds – they are easy and quick to build, so why is more not being done to make them more sustainable? They have the potential to be covered in solar panels but many are not or certainly not fully. There are also big issues around recycling and reuse of packaging at distribution centres. With the current focus on plastic waste this has potential to become a big issue."
Fashion is a particular sector under pressure with online retail. "Online shopping and click and collect for clothing massively eats into profit," says Leavey. "The issue lies with the costs of returns for the retailer. Multiple items can be returned and there are many time-consuming quality-testing processes to be managed before those items can go back on sale. This is exacerbated by the fact that items of clothing can go out of fashion in the interim and will be less desirable once they are back on sale. Until now Click and Collect has been about market share and visibility and not profit – how long can this continue?"
"Drop off points for deliveries in large buildings like offices and PRS schemes can help speed up returns but progress needs to be made on how to solve this problem more widely in an urban community. In Germany, Deutsche Post has over 1600 automated drop off points around the country with many at train stations. They claim that 90% of the population is within 10 minutes of a 'Packstation'. Can this be replicated in the UK?" asks Leavey.
"The challenge is that it’s so fragmented. There are attempts by startups at providing drop off points, such as Doddle, but will they become ubiquitous in our cities?" "Many fashion retailers are actually working harder to get buyers back into shops. This has meant taking larger spaces and devoting more space to the brand experience and improving quality of service in an attempt to increase in-store purchasing."
Perhaps the high street isn’t dead just yet. The pace of change in retail and other logistics hungry sectors is unlikely to change and the challenge for the real estate sector is how it can keep up and adapt. Indications are that the trend towards faster deliveries means there are profits to be made for those who can adapt and meet these needs.