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July 26, 2017

The European logistics and industrial real estate sector is currently experiencing its time in the sun.

Last year, total investment into the market hit a record high, beating the previous peak recorded in 2014 by six percent.

One area that is seeing growing investor interest is city or urban logistics – often referred to as ‘The Last Mile’ – thrown into the spotlight with the exponential growth in e-commerce. But, according to JLL’s Research Director in the UK, Jon Sleeman, there is also a wider appreciation among investors of the critical role that logistics plays in supporting the functioning and growth of cities, which are often the main engines of economic growth in their respective countries.

Europe’s urban population is expected to rise from around 73 percent currently to 82 percent by 2050, increasing the demand for logistics services – and subsequently logistics real estate – while exerting pressure on the supply of land within cities.

“For investors, these demand and supply dynamics are highly attractive as rising demand and limited supply will support rental growth and land values,’ he explains.

“However, for corporates seeking to provide logistics services, and for city planning authorities seeking to promote more sustainable cities, these same demand and supply dynamics pose very real challenges including how to improve customer service and contain costs despite rising congestion. For city planning authorities the challenge is to improve the overall efficiency of logistics whilst minimising adverse impacts, such as air pollution and noise.”

With growing demand for logistics in cities, increasing pressure on land, and more city planning authorities seeking to limit the adverse impacts associated with traffic (particularly diesel vehicles) there will be greater demand for a range of logistics real estate.

“As we see more action to limit diesel vehicles, we could see increased demand for transhipment points, where freight can be transferred from diesel vehicles to vehicles powered by alternative fuels – something that already happens in certain French cities, such as Bordeaux,” says Sleeman.

Similarly, Sleeman believes there may be more demand for shared-user consolidation centres, particularly if cities seek to promote this concept through incentives or regulations. While such centres already exist in a number of European cities they are limited in number and the functions they perform – often just servicing a single shopping centre or a limited shopping area.

The last-mile challenge
As e-commerce continues to expand, consumers now expect to receive goods in an increasingly short time-frame further fuelling the demand for local facilities within cities.

“In some European cities, we also seeing emerging interest in multi-storey ramped warehouses, which are common in many major cities in Asia,’ he says. “Emerging interest in this type of development reflects the growing pressure on industrial land in cities and coupled with rising land values and low yields, this type of development is commercially viable.”

Some developers are already promoting these types of facilities –Vailog, a SEGRO-owned company, is marketing a two-storey ramped building in northern Paris while SEGRO is reportedly interested in promoting this type of development in London.

Planning for the future
As well as driving demand for different types of buildings, logistics considerations will play an increasing role in city land use planning and building design.

While every type of building – from offices to hospitals – can be found at either the start or end of most freight trips, many are often ill equipped to handle freight, according to Sleeman.

“Large buildings or buildings occupied by multiple businesses – such as big office blocks or shopping centres – find it particularly challenging to handle large volumes of freight,” he explains. “As a result, we’re likely to see moves to improve city logistics and minimise adverse impacts stimulate changes beyond logistics property and impact other real estate sectors.”

Looking ahead, it is new and developing technologies that will have the best chance of addressing the challenge of city logistics and helping solve the last mile conundrum.

‘Smart cities’, based on the Internet of Things and big data, are just two examples, but both still require much better connectivity than most cities currently provide. Other concepts, such as ‘Mobility as a Service’,

‘Warehouse as a Service’ or autonomous vehicles, may also improve efficiency and reduce environmental impacts. But, while it’s still unclear how these technologies will develop – and at what speed – it seems certain that logistics real estate will continue to be critical to the success of city logistics.

As a result, says Sleeman, logistics in cities present big opportunities for real estate developers and investors.

“We’re going to continue to see rising demand for facilities from corporate occupiers which, coupled with limited land in many major cities, will support values and overall investment performance in the sector.”

Click here to read more about Industrial and Logistics investment

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Jon Sleeman

Research Director, JLL UK

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