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Urbanisation

How changing consumer habits are transforming the distribution sector

Same day. Big data. Last mile. This is the new language of logistics. Translating these requirements into state-of-the-art facilities – often in constrained locations – has created a new set of challenges for the property professional. Can they deliver?

Hugo Cox, Freelance journalist
30 January 2019

Same day. Big data. Last mile. This is the new language of logistics. Translating these requirements into state-of-the-art facilities – often in constrained locations – has created a new set of challenges for the property professional. Can they deliver?

Nine years ago, Nicholas King embarked on one of the UK's more ambitious planning applications. His company, Cheltenham-based Formal Investments, had drilling rights to 3m tonnes of sand and gravel over a 110 acre (44.5 ha) site at Rectory Farm, a stone's throw from London's Heathrow airport. Searching for a technique to keep the resultant dust out of the path of the air traffic overhead, his engineers advised he fit a permanent concrete "lid" above the drilling operations. Surely, King reasoned, the resulting space could be put to something more useful than an empty gravel pit.

His idea was to convert the underground cavern into a huge 2m ft (185,806 m) industrial space which, with a seeded concrete roof, would provide a public park above, opening up an otherwise uninspiring brownfield site. It was greeted with derision. This was London's green belt, where planners were not in the habit of approving 2m ft industrial structures – buried or not. Even if they did, who would rent it? Demand for industrial property was virtually at a standstill: by 2011, among UK logistics units larger than 10,000 ft (929 m2), 94m ft (8.7m m2) was laying vacant, reports Savills. And the new warehouse would be underground, making the smooth loading and unloading of goods vehicles a complicated slog. Even King's property adviser struggled to take him seriously.

Nine years later, things look a little different. The boom in demand for goods ordered over the internet and delivered immediately has triggered a worldwide scramble, led by Amazon, for vacant industrial space. Besides searching out every last square foot for its own warehouses and distribution hubs, the technology behemoth's disruptive business model has forced nearly all consumer-focused firms to come up with a delivery solution to answer it.

Meanwhile, a second boom – the explosion of the data economy – has resulted in sleepy farmland and unused brownfield areas being cluttered with sprawling server farms to store the vast reams of information that modern electronic devices spew out. Global revenues from the big-data industry increased nearly fivefold between 2010 and 2017, to $35bn, according to Wikibon, the open source technology community.

The final boom has been in food delivery. Firms such as Deliveroo and Uber Eats, pledging to make home cooking as obsolete as the TV dinner, have settled in industrial estates on urban fringes across the UK, Europe and the US. Restaurant outlets are encouraged to co-locate in "dark kitchens", exclusively cooking to fulfil orders, enthralled to the great modern mantra of streamlining the distribution and delivery process.

The result has been sharp and sudden. Savills' Big Shed Briefing research, published last July, reported that vacant industrial space had dropped by more than one-third in the UK, to 27.7m ft2 (2.57m m2) in 2018. While the country's residential and commercial property sectors continue to flag as the UK's exit from the EU drags on, sheds are having their time in the sun. Banks might threaten the UK government with relocations to Frankfurt in the event of a disorderly Brexit, but EU membership changes nothing for the pressing economics of delivery. For the networks serving up hot food, new gadgets and the weekly shop, the only priority is getting as close as possible to consumers' homes and offices.

New areas of influence

Today's delivery networks are increasingly local, agile and responsive, making the old model of a single facility and an army of lorries a distant memory. This has divided the market for distribution spaces: a few large, centrally located facilities, balancing cheap nearby labour sources with affordable rents; and a plethora of smaller sites in and around city centres.

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"Growing demand is more acute in urban areas, especially closer to dense populations" - Chris Jeffs MRICS, Investment Manager, M&G Real Estate

These sites are proving the most disruptive and hardest to source. In London, the heightened demand has been matched with a sharp fall in supply, as the requirement for new offices, and particularly housing, has ballooned. Industrial space in the city is disappearing at an alarming rate: 260 acres (105 ha) a year over the seven years to 2017, according to Colliers International. Over the same period, 60% of suitable land has disappeared entirely, while vacancy rates have fallen by two thirds, from 9% to just 3.5%.

Industrial land that planners do manage to preserve is getting harder to use. "They are preserving floor space, but not necessarily land," says Bridget Outtrim MRICS, director of Savills' south-east England industrial business. Before, the warehouse itself was protected, but today it is more likely to be demolished, making way for a residential or commercial development with an industrial unit – featuring the same floor space over several levels – "tacked on the side".

Never fans of accommodating steep ramps and tight turning circles into their distribution planning, occupiers have had to bite the bullet. Just as householders might have to make do with a home beside railway sidings or tucked in beside a fume-spewing flyover, industrial tenants are having to relax their grip on their obsession with ground-floor access when it comes to selecting a location.

"The Greater London Authority, and national planning policy, will steer developers and occupiers to develop and use intensified space" - Bridget Outtrim MRICS, Director, Savills

Politicians and planners are treading a fine line: leave no space to facilitate distribution networks and new housing developments will quickly become undesirable. "Yes, there is a lot of money in residential development, but residents need the services," adds Outtrim. Mindful of this need to balance the supply of industrial and residential space, the current London Plan includes policy E7, which specifically makes provision for mixed-use developments of this kind.

An example from Hong Kong should provide UK firms with food for thought. At 24 floors, industrial developer Goodman's HK$5bn (£486.3m) Interlink warehouse is the fourth-largest in the territory. Its location on Tsing Yi Island affords it easy access to the Port of Hong Kong – the world's fifth busiest – and Hong Kong International Airport's cargo terminal – the world's busiest. On its completion in 2012, demand was so great for space in the facility that 99% of its 2.4m ft2 (224,000 m2) was already leased. The list of occupiers when it opened – DHL Supply Chain, Yusen Air & Sea Services, BEL International Logistics to name a few – hint at Hong Kong's importance as a distribution hub.

Josef Hargrave is associate director and global foresight manager at Arup in London, which advises occupiers and developers on future trends in the built environment. He believes distribution developments often provide a pillar of a city or country's economic strategy. In Hong Kong's case, the city is the conduit for the Greater Bay Area, which includes Shenzhen and Guangzhou in the Pearl River Delta – China's answer to Silicon Valley – and distribution centres are being shaped to the specific needs of storing and transporting the high-value electronics it is churning out.

The growth of Hong Kong illustrates the general principle that "distribution facilities are an enabler for a country's broader economic strategy", says Hargrave. As Hong Kong competes for a larger share of global shipping and air-freight business, what it can support depends on the design of its warehouses. "Products for the pharmaceutical industry need cooling facilities, just as lithium-ion batteries need provision for dangerous goods."

Occupiers are making greater demands of the increasingly tight, vertical spaces from which they operate, as distribution becomes quicker and smarter. From electric – and soon autonomous – delivery vehicles to robotic picking, technology is now at the heart of what makes distribution firms valuable. Last May, following news of Ocado's deal to supply US supermarket chain Kroger with its distribution platform, investors began viewing the British online grocer as a tech pioneer as much as a retailer. As a result, Ocado's share price doubled in less than a month. "It was no longer being valued on its retail and revenue performance, but the value of its technology platform," says Hargrave.

Secretive technologies

But as these incredibly sophisticated – and valuable – systems are a critical element of an occupier's operations, most guard their technology as jealously as KFC's Colonel does his secret recipe. Jeffs is at pains to emphasise how closely firms such as Amazon work with developers and landlords such as M&G. However, he also admits that much of what he ends up funding are virtually empty shells close to power sources, partly to avoid a fully-fitted unit being made obsolete by new technology, but also because occupiers are reluctant to share any of their more detailed requirements with those supplying their buildings.

Close proximity to a large, reliable source of electricity is fast becoming indispensable. It helps future-proof a building, for the arrival of a fleet of autonomous electronic vehicles or an army of robot-pickers. Server facilities have similar power-guzzling needs. One of the primary draws of SEGRO's Slough Trading Estate for data centre occupiers such as Amazon Web Services, says Outtrim, is the independent power station that generates the estate's electricity. "These facilities can need as much power as a small town. Location for these firms is heavily influenced by where the power and fibre networks are strongest."

Back in Heathrow, meanwhile, Formal Investments' enormous underground warehouse, slap bang next to one of the world's busiest airports, and on the edge of one of the world's largest, most affluent and most congested cities, has now received approval from the Secretary of State for Housing, Communities and Local Government. "Construction will start soon and, a year from then, the site will provide gravel digging, warehousing and a useable park," says King. "I wouldn't be surprised if someone took the whole 2m ft."

Nine years after his property adviser had to suppress the giggles, the developer is – it is fair to assume – enjoying the last laugh.

  • This article originally appeared in the January 2019 edition of Modus