From Coimbra to Copenhagen, last mile’s irresistible investment case is attracting a broad spectrum of investors who would never have considered big box logistics.
While the growth in demand for last mile assets – serving urban communities from ever shorter distances – has been spectacularly driven by e-commerce, the segment’s fundamentals increasingly reach beyond online shopping habits. From issues of plot scarcity to megatrends spanning urban growth and supply chains, downtown delivery and storage hubs have become of central importance to cities.
‘We’ve been looking at the last mile sector for about three years now,’ says Cristina Garcia-Peri, head of business development & strategy at European private equity real estate manager Azora. ‘We always had a view that logistics as a sector provides very low barriers to entry, so that even if demand rises, there will always be enough supply to fill it. We weren’t convinced by its potential for rental growth – underlying land values for big boxes are not particularly attractive and the buildings themselves are very simple. But the growth of e-commerce changed how we looked at the asset class as a whole.’
With significant expertise in real assets, independent asset manager Azora focuses on a range of compelling investment opportunities, which also include hospitality, PRS, senior homes, real estate debt and renewable energy.
Adds Garcia-Peri: ‘The more we monitored the logistics sector, initially looking at US trends, the more we saw the amount of goods that were being delivered into cities. Consumers buy three products, and return two. We were also following urbanism trends and city tourism flows which we think can only grow. Coupled with pollution and sustainability issues, traffic within cities is going to be increasingly limited and urban land is extremely scarce in Spain and Portugal. So, when it comes to last mile, we are investing in locations that have an underlying real estate value, that can capture e-commerce demand and more, and overall justify higher quality assets.’
Players like Azora – with a granular mindset and focused, local knowledge – are also the bridge to institutional investors gaining greater comfort in the segment.
‘For some of the very large players in logistics, they have all said they love last mile but the transactions are so small that they have no way of accessing them. We aren’t afraid of amassing small assets,’ she notes.
The north way
When new boutique investor Blackbrook launched in March 2020 – at the start of the Covid crisis – one source of comfort was the immediate confirmation of its investment thesis. ‘We launched with a focus on net lease assets, heavyweight on urban industrial,’ confirms Arvi Luoma, one half of the founding partnership alongside another property veteran, Gordon DuGan.
‘So we wanted to amass about 75% in logistics, ideally last mile assets, with the remainder comprising defensive retail, and eventually other asset classes like hospitality. We have closed six deals in six months, four logistics and two grocery deals, worth over €300 mln.’
In total, the boutique has readied around €1 bn of capital to amass a pan-European portfolio, backed by Connecticut-based Eldridge.
In terms of logistics deals, the firm has already struck in Denmark – twice – where Luoma’s local knowledge and connections have proved key, with another important deal in Poland.
The Poznan asset, delivered by Panattoni, comprises a 100,000 m² facility 100% leased to a global e-commerce player. ‘Situated in close proximity to the German border, the facility services a massive regional area, including Berlin, and has a large workforce on its doorstep,’
Luoma notes. ‘The asset matched our investment criteria closely – a tenant with strong credit rating, a mission-critical site, attractive real estate fundamentals, a long-term lease and located in an established European logistics market we know and understand well.’
But it’s the urban infill sites which are particularly interesting, Luoma reckons. ‘There is such conviction in last mile logistics. The central locations are like gold dust. And the rent profile is completely different to traditional industrial - last mile units are commanding up to £20 (€23) per square foot rates which is astonishing. I do actually believe the fundamentals are now there for last mile assets to replace downtown retail: the occupiers are often the same and online retail also needs to be strategically positioned, so I don’t see why they wouldn’t pay similar rents for a dark retail unit in the same location.’
Last-mile complexity
For Garcia-Peri, the markets aren’t quite there yet in terms of last mile commanding the same rents as retail units in urban locations. ‘In city centres, there’s still a significant disparity between rents that logistics occupiers would pay compared to retailers. But are we are looking at retail parks, where the rents are much lower, and seeing if we can create hybrid solutions for retail brands in these kinds of locations. We haven’t struck a deal yet, but it’s something we’re exploring.’
However, before urban infill investors get too excited about last mile prospects for key city sites, Garcia-Peri warns that the biggest challenges for last mile – or last metre – locations are yet to come. ‘There are sites which look interesting – perhaps old garages or retail parades – which seem to have potential, but apart from needing different permits to run last mile, the surrounding infrastructure requirements are completely different. Street access has to be well connected to major city arteries and wide enough that trucks can turn. You’ll need loading bays, and local authorities will back residents if there’s a problem with noise, traffic or pollution.’
For Azora, semi-central locations are the sweet spot, positioned 10km-15km away from the cities, which are about a 20-minute drive to the centre. The firm is proceeding with a mix of acquiring value-add sites and working with turnkey developers. ‘For the most part we are doing capex, and and we are also seeing a lot of interesting deal flows in sale-and-leaseback,’ she notes. ‘Some of the economic stresses are forcing companies to look for liquidity solutions – in those cases, we don’t need to refurbish the asset immediately. In terms of development, they’re often highly specialised sites from dark kitchens to 3PL units, which need access for large trucks and small distribution vehicles.’
One of the most interesting trends is the variety of occupiers, Garcia-Peri adds. ‘We’re not just renting to 3PL players; large retailers are also occupying last mile, even if they are frequently subletting from 3PLs. Dark kitchens is another key trend which spiked during the pandemic, with successful restaurants needed additional sites to handle a volume of orders. There’s also plenty of traditional light industrial.’
Azora has also distinguished itself with its interest in proptech. The firm became an investor in Fifth Wall’s first European Real Estate Technology Fund last year, which was not just an investment play – Fifth Wall makes sure its investors can also access the latest tech to manage their own portfolios. Says Garcia-Peri: ‘As a landlord, we can deploy Internet of Things type tech to really optimise the performance of assets. Energy tech is also huge – targeting the self-production of clean energy. In parallel, our occupiers are increasingly tech savvy, such as emerging 3PL players who also deploy tech to deliver faster and more efficiently. It’s all good for growth.’
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Retail players switch strategy
Established industrial investors and developers are increasingly competing for business with office and retail specialists who have decided to pivot to last mile. UK REIT British Land is one such newcomer, which after decades of focusing on offices and shopping centres, has elected to make a play for urban logistics.
Over the past year alone, the listed player has sold £1.2 bn (€1.4 bn) worth of offices, supermarkets and shopping centres, and recently made its first moves into the shed sector. In April, it inked a £87 mln for a warehouse near London and is also looking at converting space allocated for retail developments to logistics sites.
The firm’s UK peer, Landsec, is understood to be considering a similar strategy, after unveiling plans at the end of last year to put a third of its portfolio up for sale. It has already exited 1 & 2 New Ludgate, with the office’s £552 mln sale to Singapore-based Sun Venture. Hotels, leisure and retail parks are out, while ‘urban opportunities’ are in, chief executive Mark Allan has said, which may well include logistics, healthcare and homes.
Meanwhile, defiant retailers are also studying their bricks-and-mortar portfolios to see how they can get in on the last mile act. Walmart in the US has agreed to add FedEx office locations to 500 of its US stores, and is also using its shops as e-commerce hubs to fulfil local orders.
As traditional retailers look how to take the fight to Amazon, a few Walmart stores in New Jersey and Arkansas will trial employee delivery, whereby shop workers are paid extra to drop off packages on their way home. Their efforts are coordinated via an app, where the workers can state how many packages they are prepared to deliver and the maximum weight and size.
