There were 15 million Amazon prime customers before the pandemic. Today, after twelve months of an internet shopping binge, there are sure to be many more. Every one of them has been promised next day-delivery.
Meanwhile overall online sales have surged reaching a peak of 36% in December 2020 as UK consumers rushed for their festive stuff.
So overwhelming has been the change in mood that e-commerce is being replaced by q-commerce – q meaning quick, because that’s the speed the supply chain needs to move to meet sky-high customer expectations.
Little wonder that international investors, private equity and just about anyone else with a few million to spare are pouring money into last-mile logistics. Developers, speculators, long-term investors – literally everyone wants a piece of the last-mile action. Thanks to well-funded New York investors like Blackstone’s Mileway fund, which is buying completed developments at a hectic pace, developers feel confident of making a sale. And that encourages them to build.
The latest clutch of big deals sees Mileway play a leading role. The $6 billion investment fund has been gobbling last-mile logistics assets all over Europe, most recently in a £250 million ($290 million) deal with InfraRed Capital Partners.
The portfolio comprises 2.2m sq ft of warehousing space across 50 properties in the UK and France. The UK element of the portfolio, which amounts to 1.6m sq ft, is mainly in the North West near the metropolitan areas of Manchester, Liverpool, Leeds and Sheffield. The French portfolio is entirely located in the Greater Paris region within well-established industrial hubs such as Malakoff, Massy, Palaiseau and Choisy.
InfraRed was itself a buyer, until it became a seller. It grew the portfolio to its current size through a series of acquisitions over the course of 2018 and 2019 and carried out several value-enhancing initiatives including the refurbishment of existing assets and development of new space. Around 270,000 sq ft of new warehousing was developed across three sites, the largest one being Raven Locks near Manchester, encompassing c172,000 sq ft of modern logistics space. InfraRed isn’t done buying last-mile warehousing, and is still looking for opportunities.
Dean Harrison, InfraRed’s UK investment director, says: “We expect to remain very active in the sector and are looking to acquire further assets throughout 2021 for both value-added and our dedicated Urban Logistics Income Fund.”
Blackstone’s Mileway may be leading the international investor surge, but they certainly aren’t alone. Geneva-based Stoneweg has launched a new urban logistics strategy on behalf of clients that will seek to capitalise on the continued growth in e-commerce and q-commerce. They have signed up Glovo, the Barcelona-based delivery app that operates across 21 countries, as the delivery partner for upwards of 50 last-mile logistics properties in key locations. Glovo will lease the assets. The portfolio will be diversified geographically and focus on major cities across Spain, Portugal and Italy as well as eastern European countries including Romania, Croatia, Georgia and Ukraine. You can bet your forklift something like this will be coming to the UK very soon.
What does this mean for the supply chain? First, and most obviously, it means there is money to build. So much money, in fact, that some of the problems holding back the development of last-mile warehouse are being overcome.
Andrew Bird is the managing director at specialist UK investor Warehouse REIT. He says the huge resources pouring into last-mile property means that in some locations the warehouse sector now offers very nearly the same returns to investors as residential development. If the main competitor for an urban logistics site is a residential development – and it almost always is – then this begins to give the warehouse sector a chance to pinch sites from under the noses of the housebuilders. At the very least it gives them a fighting chance of winning some of those sites.
Bird says: “In areas where the housing stock has lower values, it is now possible for warehouse developers to compete with housebuilders to buy land. In at least a few cases I’ve heard of around Greater Manchester they have managed to outbid residential developers.”
Bird says this is unlikely to be repeated widely: house prices are simply too high in much of the UK, particularly around London where urban logistics demand is at its highest. But it does mark a real change in the mathematics, and that in turn means more last mile warehouses will get built.
In normal markets an increase in supply means the price goes down. But in the world of q-commerce that probably isn’t going to happen. More last-mile warehouses will not mean lower rents. Instead, thanks to investors demanding high returns, the opposite will be true. Rents will probably rise.
Canny investors like Bird are on the alert, anxious to be sure that parcels and 3PLs with tight margins can afford to pay rising rents. They are fairly sure that, somehow, they can. This may involve costs being pushed further up the supply chain back to rolling-in-money Amazon (profit $7.2 billion last year) or to the impatient customers themselves, who may have to pay for the privilege of getting their parcels quickly.
“There are costs to be covered, including rent and sustainability, and the last mile delivery market has a lot of evolution to grow through. The result may be the costs of distributions get pushed up the supply chain, or onto customers,” says Bird.
A third effect of the surge in investment into last-mile could be that developers, priced out of the larger sites, start to concentrate on smaller sites or smaller-town locations. This would meet growing demand from the parcels operators.
Rob Peill, head of industrial at Property Alliance Group, explains: “We expect occupiers to continue to acquire more sites, but their focus will shift to smaller units in higher numbers. This approach will enable them to cover a much wider area so they can reach customers in the short timescales they’ve become accustomed to during the pandemic.”
“Lockdown restrictions have increased demand for last-mile logistics, but this is unlikely to change once restrictions are lifted. Consumer expectations regarding quick and convenient deliveries will remain high.”
The evidence so far in 2021 supports all three ideas. Data from Cushman & Wakefield suggests that 2021 could be a record year for speculative development with as much as 2 million sq ft already committed during the first three months of the year. And exactly as predicted, this is unlikely to cut rents because insatiable demand from occupiers means that already 400,000 sq ft of this is pre-let. By the time construction work is completed maybe all of it will be let.
Bruno Berretta, lead logistics researcher at Cushman & Wakefield: “You would expect this to drive further rental growth.”
The q-commerce revolution is still in progress. The way costs are distributed between customers, retailers and supply chain is still changing. But one group of people feel quite confident that their financial position is safe: the property investors now flooding the warehouse market with money.
Mileway was buying throughout the pandemic.
Citivale, the Yorkshire-based property investment and asset management company, and US property investor Investcorp sold a 692,000 sq ft seven-shed UK industrial portfolio for an undisclosed sum as the second UK lockdown loomed.
The Rocket portfolio, which contains two properties in Yorkshire, has been bought by Mileway in an off-market transaction.
The portfolio properties, all of which have been managed by Citivale, are located in Batley, South Elmsall, Liverpool, Warrington, High Wycombe, Glasgow and Edinburgh. They are all close to key transport corridors.
Mileway has also been scoring deals, pandemic notwithstanding. Three further lettings totalling 90,000 sq ft have completed at Mileway’s holdings in Haydock.
Logistics giant Wincanton will occupy over 71,000 sq ft of space at the site. Waterlogic will take 12,472 sq ft on a 10-year lease, and New Age Group 5,716 sq ft on a 5-year lease.
Robert Kos, a director in JLL North West’s industrial and logistics team, says: “The market remains very strong in the north west, as demonstrated by this tranche of high-quality lettings. The sector has continued to perform well despite the challenges presented by COVID and Brexit, and we’re confident that it will thrive as we move out of the pandemic.”
The site is next to the A580 East Lancashire Road and within one mile of the M6 at junction 23.