Last mile – a new asset class

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Last mile – a new asset class

Published 2 marzo 2022

Sally Morris-Smith, Real Estate partner and industrial sector champion at international law firm DAC Beachcroft considers the continuing evolution of last mile facilities, an emerging sub asset class of Industrial.

Logistics and warehousing are moving from back room to front of house, as the significance of their role in internet shopping continues to grow. 24-7 delivery has gone from “nice to have” to “must have" and that demands proximity to the customer. Competition for space is furious, especially in the UK’s largest urban areas.

Colliers Industrial and Logistics Research revealed that ‘2021 saw a rental increase of 8.7 per cent for the whole industrial market, the highest growth since September 1990. This was prompted by a record low supply of 18.1 million square feet (down 34 per cent year-on-year) triggered by a new record take-up of 50.7 million square feet and a record annual share of online sales of 29.1 per cent in 2021, up from a share of 28.1 per cent year-on-year (ONS).’1

At the same time, the British Property Federation and Savills reported that real demand for warehouse space is at least 29 per cent higher across the UK than historic take-up levels suggest.2

Further stages have entered the distribution chain, where once there was only warehouse and then store. Richard May, Joint MD at real estate consultancy Lysander says “Goods are picked at the big warehouse, broken down into batches at a second warehouse and sent to third local sites, from where they are shipped to the final postcodes. This is where the boom has come from.”

Furious Competition

Jonathan Compton, Senior Director at CBRE, cites the Panalux site in Park Royal, West London, by way of example of the increasing demand. “It’s just shy of three acres, was bought for £14.7 million back in July 2018 and has just sold for just north of £50 million. Investors are having to be very competitive to secure land for industrial use in urban areas.” Sally confirms this trend is consistent with the experience of many of our own industrial clients seeking sites for expansion and we are more often including the additional comfort of exclusivity agreements and lock outs to avoid gazumping.

It’s clearly not putting off many. Insiders agree that there is a ‘wall of capital’ fuelled by institutional money looking to spend money in the space. This competition, tied with the tight pressure on available land, is fuelling the price hikes.

So where has the spare land gone? Paul Weston, UK Regional Head at Prologis, points out that London lost 1,000 hectares of industrial land between 2005-2015 that could have supported around 70 million square feet of logistics space. “It went to the Olympics, to Crossrail, to big residential and regeneration schemes. This scarcity of land, coupled with high demand from investors, has driven prime yields for logistics warehouses to levels only previously seen for high-end Bond St retail.”

Jonathan Compton adds: “To put it into context, last year in the UK there was just under £18 billion spent in investment on UK industrial logistics, nearly twice the previous record, which was in 2020, at £8bn. Those are huge increases in terms of demand. If you look at multi-let estates, individual distribution centres, portfolios, all were at record volumes last year, driven by significant rental growth projections.”

The city centre sites attracting so much attention are the delivery stations for fast ecommerce sorting and sending to final destinations. These new urban facilities offer lower site cover than traditional warehouses, which would normally offer a building to site ratio of about 40-50 per cent. “With the newer facilities, the building to site ratio can be significantly lower, purely because the buildings themselves are not that critical to the operation,” points out Jonathan Compton. “It’s more about the vehicle operations.”

Two key outcomes

The difficulty of securing appropriate sites is leading to two outcomes.

First, investors are targeting more land just outside city centres, with good road communications into the urban areas and HGV-friendly ring roads or junctions nearby.

Rui Nobre, CEO of real estate developer and investor Griffen, goes further. He suggests that the last-mile market has become confused with what he calls the last-minute market, typified by the explosion in quick-delivery grocery apps. While he acknowledges a demand for such services, he believes the high cost base casts some doubt on the longevity of their business models.

“Our opinion is that a logistics operator is much better suited to serve, for instance, both London and Birmingham from a site on the M40,” he explains. “You will find rentals at £7.50 to £8.50 per square foot, and labour available at £12-15 per hour. Compare that to London where in some cases land is fetching north of £10 million per acre. That will have to extrapolate to rentals at greater than £25 per square foot, more than three times the costs of an M40 site, while your labour costs, if you can find them, are going to be £20-£25 per hour. So your cost of being in London is SO much higher, and what are you gaining? This is about high-cost, last-minute delivery and it’s a very different principle to last-mile.

Last-minute is very bespoke, it’s about bikes and scooters. In the south east of England, because of its people per square mile density, last-mile is equally well serviced from a larger facility on the M40 which can still make multiple same-day deliveries with cheaper rentals and labour.”

The second outcome of spiralling city-centre demand is greater intensification, building taller and closer together. Perhaps even multi-storey warehousing, as is now common in high-density Asian cities such as Tokyo. This would present as 30-metre warehouses with four or five floors, compared to the more usual six metres, with perhaps a single part floor mezzanine, as specified today.

“You are going to see multi-level and multi-storey in London before too long,” predicts Paul Weston. “You simply cannot pay the prices that are being asked, with the rental growths they assume, without more dense use of the space.”

We suggest that while multi-level facilities may solve the pressure on space in the short term - these facilities will bring their own headaches for investors, planners and occupiers alike. Traffic movements can become very complicated if the site and its ramps and road accesses serve different needs and different delivery timescale requirements. Add to that the logistics around accommodating different types and sizes of vehicle in a single building - the mix of occupiers can be tricky. Meanwhile, the more imposing visual impact of taller and more intensively visited sites is unlikely to sit well with planners and neighbours.

Paul Weston suggests the challenges as “If you build it, will they come? Then there are the politics of the planning process.”

Rui Nobre agrees, but offers words of caution around the underlying costs and appeal. “there is definitely a place for those kinds of facilities. It’s a bespoke asset class, though – very expensive to build and very bespoke in terms of the types of operators that can use that site.”

Repurposing Challenges – a final word

While London logistics faces a particularly intense real estate battle, other UK cities such as Leeds, Birmingham and Manchester are facing similar issues. Land availability is more limited because the focus is on much-needed residential uptake. CBRE’s Jonathan Priestley highlights that occupiers will need to consider a decarbonising economy as part of their logistics warehouse strategies.

“If you’re investing in one of these facilities over the next ten, 15 or 20 years on a lease, then the repurposing of existing assets, such as retail parks and retail buildings, into electric van-friendly last-mile logistics facilities, will form part of this changed geography,” he says.

Indeed, the industry is becoming accustomed to the new idea of micro-fulfilment, in which bricks and mortar shops can be repurposed as automated click-and-collect facilities for local customers.

Tim Roles, Joint MD at Lysander, is seeing similar challenges now developing with clients across Europe as ecommerce on the continent catches up with the UK. He says the biggest challenge is keeping ahead of the technology and its energy take. His colleague Richard May adds: “Connectivity is going to be another issue – telecommunications and power. You used to have a set of shelves, some forklifts, manual pickers, plus lorries. Now you have very intelligent software-based picking systems requiring a different scale of power draw. As load requirements for the site accumulate, it will be something service providers will need to address.”

So will 2022 be more about a change in specification and increase in taller facilities around the metropolitan periphery, or a continuation of the institutional steady land grab along major transport networks – it remains to be seen…either way it’s going to be busy!



1Colliers Industrial and Logistics Research, January 2022


Sally Morris-Smith

Sally Morris-Smith


+44 (0)161 934 3014

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