Afons Nißl runs a shoe store near Munich. However, he now sells more on Amazon and eBay than in his physical shop. In just two years, his online sales have risen from 5 to almost 60 percent. The retailer spends an equivalent amount of his time preparing and sending packages. Does Alfons Nißl still have a shop, or is it now a warehouse with sales outlet?
Nißl's case is not isolated. Processing online purchases is taking up more and more space. “Retailers are developing a new sense of identity through their multichannel strategies. They understand that they are closer to the customer – and take advantage of their brick-and-mortar locations,” says Alexander Nehm, the Managing Director of Logivest Concept (see interview on page 11). There are a growing number of pickup and delivery services like Click & Collect or Ship from Store. At John Lewis, the UK-based retail chain, half of all online purchases are collected in-store; Decathlon and IKEA have developed Click & Collect-compatible store formats. More and more brick-and-mortar retailers – including German retailers MediaMarktSaturn and Galeria Kaufhof and British supermarkets Sainsbury’s and Tesco – now deliver purchases to the customer's doorstep.
Amorphous shop floors
The white paper from the EHI Retail Institute “Expansion Trends – Spring 2017” confirms that warehouse and pick-up logistics are trending upwards for retailers. Among the 250 major chains surveyed, such as German retailers Rewe and Deichmann, a growing number are seeking easy-to-reconfigure spaces, preferably with an expandable warehouse, convenient entrance and exit and drive-thru. However, that's not yet the case everywhere. In asset management at Union Investment Real Estate GmbH, these kinds of requests are the exception among tenants of the core shopping centres. “In the successful centres like Lago and Alexa, for example, we created additional warehouse space by converting leisure or office space. That also worked well economically because the rent for desirable warehouse space is significantly higher than for office space,” says Ralf Schaffuss, an asset manager at Union Investment Real Estate GmbH.
of Europeans currently live in cities; in 30 years, that is expected to climb to 82%
Space hogs with not enough space
Generally speaking, logistics wants to move into urban centres. Why? Because in the past, the customer came to the goods. These days, the goods come to the customer. With the supply chain shifting away from goods to the consumer, from push to pull, demand for well-networked depots is rising. In the push system, there were three nodes: producer, distributor and retailer. In the pull system, the supply chain is more granular because direct delivery to millions of individual customers is more laborious. At the same time, the pull perspective makes the flow of goods more efficient because targeted demand triggers shipping instead of estimated forecasts. In addition to massive fulfilment centres in the greenfield there is demand for package handling hubs near cities and many sorting and delivery centres in the city that deliver to residences, pick-up stations and package collection points.
That would be fine – if existing cities weren't lacking the space to integrate these space hogs. “Where urban rent and land prices are almost unaffordable for the logistics sector, the question of how to integrate stores to optimise the supply chain is one of the hottest topics in urban logistics,” says Marie Maggiordomo, Director of Operations - Property Services at Goodman. London is leading the way, having lost 25 percent of its commercial space to housing – although the UK has the highest online sales in all of Europe at $174 billion. According to a 2015 report from the Ecommerce Foundation, France was second with $72 billion and Germany third with $66 billion. With annual growth rates between 11 and 14 percent, there are no signs of slowing.
In ten years logistics will be anormal part of mixed-use projectslike stores, housing and officesare today.
Cooperation is needed
Zalando has a vision for alleviating the shortage. The online fashion czar wants to network Europe's infrastructure of stores one by one with large warehouses. Since it doesn't have its own stores, it's testing different ways of cooperating with local shops under the banner of integrated commerce. The goal is short supply routes and no product shortages. Local boutiques pack and send Zalando packages across Germany, or Adidas's Berlin warehouse and flagship store helps the online retailer with sold-out models. If brick-and-mortar retailers embrace the cooperative logistics idea, customers will receive their ordered products very quickly because the closest store processes the order.
Change of use is another way to integrate distribution centres into existing cities. As Raimund Paetzmann, Vice President Corporate Real Estate (including network planning) at Zalando, explains, the challenge of city logistics isn't really new.
“Supermarkets, specialist shops, department stores and malls want to be supplied with huge quantities of goods. Their delivery experience depends on their readiness to convert their space's use. Even dark offices work if they have adequate accessibility and a loading ramp.” Consequently, the logistics industry could become an alternative tenant for vacant retail properties in B and C locations. Because the last mile – transportation to the customer's doorstep – consumes 30 percent of logistics costs according to Paetzmann, rents of between €10 and €15 per square metre per month are conceivable for cost-saving locations, even more in London and Paris. And because a lack of space makes people creative, ideas for using car parks, offices or malls at night for distribution centres have emerged. If this approach catches on, new opportunities for cash flow optimisation will open up in asset management.
For 30 years, cities focused on pushing logistics out of their centres. Now they're all considering ways to bring it back
Delivery lorry shuffle
As creative as retailer strategies for optimising the infrastructure may be, they do not alleviate the pressing problem of excessive delivery traffic in metropolitan areas. This is growing continuously, bringing with it the risk of gridlock. The German Package & Express Logistics Association estimates that 3.1 billion (package) shipments were sent in 2016 in Germany alone, 150,000 more than in 2015. This is expected to grow to 3.78 billion by 2020.
“For 30 years, cities focused on pushing logistics out of their centres. Now city officials in European metropolitan areas are considering ways to bring it back,” says Walther Ploos Van Amstel, professor of city logistics in Amsterdam. For him, although delivery traffic sparked the debate, the fundamental problem is urbanisation.
Almost 75 percent of Europeans currently live in cities; in 30 years, that's expected to climb to 82 percent. To supply thousands upon thousands living in a small area, urban logistics needs to improve its overall efficiency. This applies equally to consumer goods, waste disposal and B2B deliveries. In other words, metropolisation is redefining quality of life and the requirements for city and land-use planning. Where once individual mobility and residential comfort dominated planning, smooth supply logistics is becoming increasingly important. It helps cities to secure their competitiveness.
City logistics is already on the agenda at all policy levels – from local government to the European Parliament. These efforts are primarily aimed at stemming traffic, noise and air pollution. Low emission zones are the most common countermeasures. They ban heavy-polluting diesel vehicles from city centres in favour of more environmentally friendly alternatives. London, Amsterdam and Brussels are pioneers, with Athens, Madrid, Paris, Berlin and Munich announcing measures as well. Courier, express and parcel (CEP) service providers have already responded: DHL is building up its own fleet of electric vehicles, Schenker is testing electric lorries for long distances and UPS is experimenting with e-bikes and micro-depots in Hamburg.
A new asset class is born
With traffic abatement in mind, the ideal property would be an independent service hub for handling packages, meaning a non-CEP-affiliated centre that sorts the collected packages for the catchment area by postcode and consolidates them on neutral delivery vehicles every morning. However, the CEP providers protest because none of them wants to lose contact with the customer. The model could only be implemented with strict local government regulations and a business model that finances operations.
“City logistics is the hot topic. Everyone is thinking about how to sustainably integrate logistics in cities and reduce emissions, noise and pollution. Up to now no one has systematically thought about how the properties themselves should be set up.” Goodman's Strategy Manager Marie Maggiordomo has made this point at countless European logistics conferences. The global warehouse specialist has therefore taken the initiative and announced a series of future labs with selected companies along the value chain. “City logistics involves a lot of stakeholders. We are bringing all the representatives together at one table in order to foster acceptance and develop convincing solutions – from government agencies and chambers of commerce to shipping companies, logistics providers, property investors and managers,” says Maggiordomo.
“These days urban logistics properties are sought more often than they are found because there are scarcely any suitable properties in inner cities. What we do have are hubs and micro-depots for handling the last mile. These spaces are too small for freestanding facilities,” explains Alexandra Tornow, EMEA Industrial & Logistics market researcher at JLL. “Assets will also be built in cities in the foreseeable future,” she predicts. This includes handling hubs called loading terminals that are located at the city limits to transfer freight to environmentally friendly vehicles in order to comply with diesel bans. It also includes multi-storey warehouses due to small plots of land and high prices. For instance, Segro is building a two-storey warehouse in Munich, Vailog has 64,000 square metres over three storeys in Gennevilliers, France, and Sogaris has combined the warehouse portion with other uses in its three-storey Chapelle International property in the north of Paris.
Clever solutions with mixed-use
Even if the French logistics provider wants to keep its Chapelle International property in its own portfolio, it shows what investor-worthy projects could look like: half of the 45,000-square-metre mixed-use property is a product warehouse, handling hub and collection point, while the other is occupied by offices, a restaurant, gym and vocational school. However, this can be problematic at times. “Who would want to live next to a warehouse among endless lines of diesel lorries? On the other hand, who is willing to do without the convenience of online shopping?” asks Sogaris CEO Jonathan Sebbane, describing the tension surrounding city logistics.
His building type offers suitable solutions: the design is appropriate and at the same time multimodal, so there are at least two transportation alternatives. Furthermore, it prevents air and noise pollution. For example, deliveries in the massive catchment area in the north of Paris are handled with e-bikes, biogas lorries and a shuttle transport train for which a noise-dampening 400-metre terminal was built. Thanks to the system developed in-house, costs per kilometre for train freight are competitive with those for lorries. If a diesel ban is introduced in 2020, the location is prepared. The decision on an additional hybrid property in Bercy Charenton will be taken in 2017 – a comparable project in the south of the city which Sogaris bid for with an even more integrative solution.
The project in Beaugrenelle in central Paris is also forward-looking. Here the urban logistics pioneer integrated 3,000 square metres of warehouse space in the underground car park of a residential building. A practical combination that is not feasible in every country. German zoning laws do not allow that currently, but may in the future. There is discussion of an amendment to the law that will designate urban areas as a zone with a permissible noise level similar to commercial areas. For Vice President Corporate Real Estate Paetzmann, it's a step in the right direction. “The goal needs to be integrating modern logistics through clever mixed-use solutions. In ten years it will be a normal part of mixed-use projects like stores, housing and offices are today,” he predicts.
Investing along the supply chain
It remains to be seen whether amending zoning laws will make it easier for logistics firms to secure locations in Germany. “In order to create space in crowded cities, the most price-conscious of all asset classes will need to correct its willingness to pay upwards. Competition with social housing construction will heat up in the periphery, and with B and C commercial locations in the city centre,” says Catella researcher Thomas Beyerle, describing the challenge. Although there are few investment opportunities in city logistics due to a lack of suitable offerings, investing in urban area logistics is certainly possible. “Urban centres have the greatest demand for logistics. The trend is attracting a growing number of investors who were previously interested in retail properties.
A retailer used to need 200 stores to cover the UK market, but now 70 locations, a website and warehouse capacity is enough,” notes Jack Cox, Head of EMEA Industrial and Logistics Capital Markets at CBRE, looking at logistics investment volumes that have been growing steadily since 2009.
“Investors in urban logistics have now understood that hubs in the greenfield and last-mile depots in the city and periphery belong in the same value chain,” continues Cox, encouraging investors to take advantage of opportunities along the supply chain. “The returns were comparable ten years ago. These days the capital value of urban logistics property is significantly higher per square metre. Despite this, the returns are appealing because their prospects for rental growth are greater,” he argues.
New image for an entire industry
The future of logistics property is enveloped in myths, fashions and trends. A conversation with Alexander Nehm, Managing Director of Logivest Concept.
Mr. Nehm, what does the future of logistics property look like?
Surprisingly similar to today. The bulk business will stay the same. Only the urban centres are highly dynamic, but city logistics is a relatively small industry segment. That's why we advise people in charge of logistics and real estate not to panic. No one should expect revolutionary upheaval from digitisation and globalisation over the next ten years – at least that's what we found in our study “The future of logistics property.” Instead of speculating, we looked carefully at what strategies are on managers’ minds and what plans are solid and specific. That ultimately decides what will happen in the next five to ten years.
Won't e-commerce stir up the logistics scene?
Won't e-commerce stir up the logistics scene?
That’s a misconception because we tend to equate e-commerce with Amazon. They forge ahead with services like same-hour delivery and use it to define benchmarks that are unachievable for most companies. The majority of retailers have one centralised warehouse per country or region for e-commerce and do not establish their own granular logistics networks. They rely on CEP (courier, express and parcel) service providers to keep their next-day delivery promise. It remains to be seen whether and where the mainstream needs to learn to compete with Amazon.
What myths and fashions exist in logistics, and what trends are here to stay?
Drones and delivery robots will remain spectacular exceptions. There are too many unclarified legal and insurance issues with them. Neither 3D printers nor Industry 4.0 will fundamentally change buildings and locations in the near future. By contrast, e-commerce, e-mobility, the Uberisation of logistics resources and smart properties are all here to stay. The latter will reduce additional costs and increase willingness for long-term leases.
To what extent is city logistics changing logistics locations?
Once again, logistics users who consider city warehouses relevant are in the minority. Online giants, package delivery providers, urban retailers and grocery stores need these facilities. They place consolidation warehouses in the suburbs or the city. But urban land is scarce, expensive and regulated.
This forces alternatives such as changing the use of existing buildings or mixed-use options such as drive-thrus and pick-up stations. There are no universal location standards from an overall logistics perspective. Network service providers all follow their own idea of efficiency.
What will change logistics locations is automation: logistics is emancipating itself from personnel. In the future firms will be able to settle in easily accessible locations with a small catchment area. In addition, technology is enabling logistics facilities to be built upwards instead of outwards – we will see more of this over the next five to ten years.
Looking back at 25 years of city logistics experiments, you’ve said, “The largest common denominator is failure.” So how can logistics work in cities?
The reasons for failure are economic. Building extra handling hubs to bundle products for distribution to the end user is costly. People used to invest grant money – when it ran out, the projects vanished. These days bulk shipping ensures a solid financial base.
The second reason is that cooperation is essential. The pressure was lacking in the past, now regulations require it – the diesel ban in urban centres hangs like the sword of Damocles over the industry. Perhaps we will still see a time where CEP service providers share distribution to end users in unaffiliated white electric vehicles.
Third, logistics underwent an image change thanks to e-commerce, from urchin to facilitator. That's why residents as well as local government officials are more open to tolerating them in cities.