It’s been a tough few years for physical retail, battling both against the rise of e-commerce volumes and the effects of the global pandemic. But just as quickly as retail property’s star has fallen, the sun has risen over logistics real estate. The sector’s stellar fundamentals have prompted funds and developers to create increasingly generous allocations to sheds, in the hope of benefitting from rental hikes as demand continues to climb in the face of narrow supply pipelines. However, just as occupiers are struggling to lease space, investors are discovering that competition and high prices are making it difficult to amass significant volumes of the assets they want.  

For some funds, this means taking a step back from the hottest segments, such as ultra-urban last mile properties, to focus on space a little further out of cities. This is the current strategy for the UK arm of US privately held firm The Ardent Companies, which launched its British venture in 2021. Says managing director Richard Benson: “On the whole, we’re happy to leave the likes of Blackstone’s Mileway and MARK’s Crossbay to bid for premium-priced last mile schemes. We are largely focusing on occupiers who need small to medium-sized units in an accessible location but perhaps not the prime location. These sites also offer value to us as an investor.”

However, this doesn’t mean that Ardent is shying away from the urban logistics theme. As an investor also interested in retail, Ardent sees tremendous opportunity in creating hybrid assets in downtown locations that unite the best of retail with a slice of logistics. Its purchase of Touchwood shopping centre in Solihull, West Midlands, last summer had nothing to do with retail’s distress narrative, Benson says. “This is a successful retail asset where we feel we can create value not only by adding more F&B and leisure, but we see opportunities to add a dark kitchen or other urban logistics elements,” Benson explains. 

The argument is a compelling one, and echoes the views of other investors – and town planners – that perhaps the way out of this conundrum is to create mixed-use assets that incorporate logistics, rather than trying to directly swap out downtown retail occupiers for parcel handlers or goods warehouses. 

Last mile challenges

While over in the US, Amazon has succeeded in converting entire, obsolete malls into fulfilment centres, the feasibility of these projects reflects both the location of the malls – in low density sites flanked by major roads – and how much retail distress is in play on the other side of the Atlantic. European city centre sites are characterised by much greater complexity, suggests Cristina Garcia-Peri, head of business development & strategy at European private equity real estate manager Azora. Needless to say, her firm is executing a successful last mile conversion strategy in Spain and Portugal by sticking to specific parameters.

Azora usually focuses on a “sweet spot” some 10–15 km away from cities, which is still a useful range for occupiers such as 3PLs and dark kitchen operators. The firm is also exploring the potential for hybrid logistics solutions at retail parks, which offer both low prices per square metre and simple warehouse structures that are ripe for conversion. But she underlines that being selective is key. 

“There are sites which look interesting – such as garages or retail parades – but apart from needing different permits to run last mile, the surrounding infrastructure requirements are completely different,” Garcia-Peri notes. “Street access has to be well connected to major city arteries and wide enough that trucks can turn. You need loading bays, and local authorities will back residents if there’s a problem with noise, traffic or pollution.”

Going deep

Another firm that is exploring the depths of what is possible in urban areas is industrial specialist Segro, whose French operations include both multi-storey and underground warehouses. While its multi-level Paris Air2 Logistique warehouse was developed for Ikea and Leroy Merlin in an out-of-town position, its latest, subterranean solution occupies a prime location beneath the city of Paris. Segro has teamed up with French office specialist Icade to transform the remnants of a former goods railway station, Les Gobelins, into a mixed-use project combining state-of-the-art offices with an underground last mile logistics hub.  

While Laurence Giard, general manager, Segro France, notes that “underground warehouses are extremely costly to excavate from scratch”, the firm’s latest scheme in the French capital’s 13th arrondissement exploits previously dug warehousing space under the historic former station. Overground, tired 1970s shopping centre Les Olympiades will make way for two timber framed office buildings, plus gardens, greenhouses and sports pitches. Giard explains that the last mile facility will connect to its urban surroundings through the introduction of soft mobility solutions, including electric vehicles and delivery tricycles. Recycling centres and repair shops will further cement its role in the local community.

Some experts are predicting that a shortage of land will cause warehouses to be built underwater and in the sky.

Meanwhile, leading occupiers are also adding their voice to the debate. Last year, Amazon launched the European roll-out of its proprietary last mile hubs, which it calls delivery stations, in a strategy involving collaboration with local developers. The assets are run by its own in-house logistics operator, AMZL, which was created to reduce the firm’s reliance on third-party delivery services and to hedge against courier price increases. While a few new sites have already launched in the UK, German, Dutch and Italian assets are also springing up. In November 2021, Goodman consigned Amazon’s new Pioltello Logistics Centre near Milan, which is designed to reach 2.5 million customers in around 30 minutes. As with other delivery stations, the asset’s green credentials are impressive, including photovoltaic roofs and a fleet of electric vehicles from Germany’s Mercedes-Benz and US car manufacturer Rivian. 

Tech solutions

It’s a reminder that, amid ongoing supply chain issues, labour shortages and space constraints, technology also has a valuable contribution to make to the space race. Last year, US-based warehouse management orchestration platform Fulfilld raised $2.5 million in an oversubscribed seed funding round co-led by Pi Labs and involving former Amazon CEO Jeff Wilke, underlining enthusiasm for the segment. The software helps occupiers optimise their footprint by tracking stock and asset utilisation, as well as offering add-ons such as workforce wearables.

Says Zain Jaffer, real estate and proptech venture capitalist and partner at Blue Field Capital: “Today, distribution centres can leverage smart technologies to predict and analyse consumer patterns, helping them better understand and secure their supply needs. AI management systems are facilitating a better system for the receipt and dispatch of a greater supply volume.” And while drones are already delivering groceries to the doors of some consumers, the tech possibilities remain limitless. “Some experts are predicting that a shortage of land will cause warehouses to be built underwater and in the sky,” Jaffer adds. As ever, watch this space.