15.05.2017 by Matthias Pink

Urban Logistics - New Challenges for Cities and Investors

Areas for logistics properties are becoming scarcer. Demand is nevertheless increasing and requirements regarding the areas are changing. Where, how and by whom can logistics halls be built in the future at all? Matthias Pink, Head of Research Germany at Savills Beratungs-GmbH, answers these and other questions.

In the stationary retail sector, the customer has to come to the goods. In online retail, the goods will get to the customer. This sentence pair contains the answer to the question of what retailing could look like in the future: online is the norm, offline is the exception. The dynamic growth of online retail is thus far from over.

The demand for logistics space is growing rapidly in the shadow of the e-commerce boom, especially since online retail needs more logistics space than the traditional retailing, due among other things, to the higher return rate. Since we as the customers have also become accustomed to ever shorter delivery times – we like deliveries within a few hours, while next day deliveries already seem to take forever – the additional need arises especially where we live and work, i.e. close to major metropolitan areas. In other words, much more logistics space will be needed in the future, precisely where land is already scarce and more or less all uses are in need of expansion.

However, even in such cities and regions there are areas that are no longer used for their original purpose. And precisely these “brownfields” will (have to) be increasingly used as logistics spaces. In the Rhine-Ruhr region, one of the most densely populated areas in Europe on the one hand and a region with an above-average proportion of unexploited industrial areas on the other, the proportion of these brownfield developments was already almost 80 % from 2010 to 2014, as shown in a study (Logistics und Real Estate 2015) we presented together with Bulwiengesa and other partners. In other regions of Germany, these potentially available areas are used even less frequently - either because there are enough greenfield areas or because there is (still) a lack of brownfield potential. However, in the future we will increasingly see brownfield developments especially in the cities, and they will not only be confined to old industrial areas and traffic areas, such as former freight depots or ports. In the future, logistics spaces are also likely to arise on the premises of gas stations, car parking lots or car dealerships, DIY stores or other specialist markets that are no longer used. The increasing scarcity of undeveloped land and the political will to reduce soil sealing nationwide from currently more than 60 hectares per year to 30 hectares by 2030 will contribute to this.

What is built on such brownfields, however, has little to do with the mega warehouses we are used to seeing at highway junctions. Instead the tendency is towards considerably smaller urban logistics centers that are used to quickly supply the surrounding retailers as well as the local population. In many cases, the resulting logistics spaces will also be part of a mixed use development. It is not quite clear what typical urban logistics real estate will actually look like in any case. This is because the structural changes in retailing and the related supply chain as well as the rapid technological development in the logistics sector are accompanied by a change in logistics real estate as such. To this extent, it is also unclear whether urban logistics properties developed today will still meet user requirements in ten years. Together with the associated user demand for ever shorter lease terms - nine out of ten users prefer a term of five years or less - this type of real estate implies a relatively high degree of risk for investors. Most risk-averse investors are thus not interested in such properties, which tend to attract specialized players with the appropriate know-how.

Added to this is the fact that some logistics service providers and online retailers see inner-city distribution space as having such high strategic importance that they prefer to buy these properties themselves. To this extent, it is quite conceivable that the proportion of owner-occupied new logistics projects, which has been around 40 % nationwide in the last few years, will increase in the coming years. However, this should only be a transitional phenomenon. After all, even the technological transformation cannot change the fact that this real estate is only a means to an end and has nothing to do with the core business of logistics companies and retailers. And in a few years, we are all likely to have a clearer picture of the requirements urban logistics properties must meet in order to be viable in the long term. Then, on the one hand, companies will lease more often rather than buy, and, on the other hand, risk-averse investors will add urban logistics real estate to their portfolio just as naturally as they currently invest in office and retail properties.

Matthias Pink, Head of Research Germany, Savills
Susanne Heck
Head of Marketing & Communications
Mergenthalerallee 15-21
65760 Eschborn
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