By James King
The retail world is rapidly evolving. Over the last decade the stratospheric growth of online-only retail behemoths like Amazon (AMZN) has forced traditional brick and mortar retailers to develop defensive e-commerce strategies and the intensification of competition has coincided with growing consumer demand for instant gratification. Where once consumers were happy to wait for a few days for items to be delivered, now they want their orders the next day or even in the next hour.
Changing consumer shopping habits
This seismic shift has had a significant impact on the UK property landscape. Since the global recession, high streets up and down the land have been decimated as retailers have failed to keep pace with the demands of modern consumers. Some have fallen into administration, some have survived by the skin of their teeth after 'right-sizing' their store estates, shuttering scores of shops in the process. But it's not just retail units that have been impacted by the change in consumer shopping habits. The industrial sector has also been affected.
The new, rapidly growing online retailers have been aggressively snapping up industrial stock across the UK to fuel their aggressive expansion plans and their growing influence on the market is reflected in the latest data on take-up volumes. According to real estate consultancy Gerald Eve, Amazon alone was responsible for a staggering one-fifth of all large warehouse lettings during 2016.
Projected growth of urban logistics space
And that could just be the tip of the iceberg compared with future take-up. In a recent report christened 'How Soon is Now,' real estate lawyers Addleshaw Goddard estimated that the logistics sector requires circa 18 million square feet of new space to be delivered annually in order to keep pace with an e-commerce sector that currently accounts for 20% of the UK retail market - and growing.
It's likely that a healthy percentage of the new square footage required by these e-commerce giants will be built in and around major urban areas as retailers develop 'urban logistics' strategies that enable them to deliver orders as fast as consumers demand them.
We've already seen a number of developers and funders up and down the UK kickstart speculative development of this new generation of urban logistics. This new space has sprung up on the outskirts of major UK towns and cities to satisfy growing demand from both pure-play online retailers and traditional retailers alike. The thinking goes that these networks of smaller logistics units - typically sub-60,000 sq ft - will be constantly fed by the larger regional distribution centres of 250,000-500,000 sq ft plus that are located near key motorway junctions.
Obstacles to growth
But this new property sub-sector is not without its problems. These urban logistics occupiers are looking for edge of town sites with good connectivity - exactly the sort of development opportunities that housing, retail park and care home specialists are also in the market for. All of these operators have deep pockets and potentially offer developers and landowners a better return on investment than an industrial unit.
Furthermore, many institutional landlords have serious concerns over the robustness of the business model of some of the newer pure play online retailers, many of whom have yet to endure a significant economic downturn. They prefer the stronger covenants on offer from long-standing traditional brick-and-mortar retailers who have ridden out numerous recessionary storms in the past and are also looking to expand their e-commerce offer.
So although this nascent sub-sector is creating a bit of a stir in property circles at the moment - and rightly so - it may be a while before the urban logistics concept truly catches flight.