Business

Rapid delivery ‘arms race’ drives commercial property rents in London


A worker fulfills an order at a Gorillas “dark shop” in London’s trendy Shoreditch district on May 20, 2021.

Hollie Adams | Bloomberg | beautiful pictures

LONDON – The battle for the space to power the super-fast grocery delivery boom is driving up rents in London’s commercial real estate areas.

Companies such as Getir, Gorillas and Zapp, which promise to deliver essential items to people’s homes in minutes, have swept across the UK capital this year.

Such services rely on so-called “dark shops,” small warehouses used to prepare online grocery orders for delivery. Similar to dark kitchens in the food delivery world, these establishments do not serve customers in-store.

Estate agents say they have seen average commercial rents rise in prime locations in London thanks to an influx of demand from fast grocery delivery companies.

In West London, base rents for small industrial units measuring around 20,000 square feet rose to £35 ($46) per square foot in the third quarter of 2021, up 75% year-on-year. before, according to figures shared by real estate agents. Knight Frank.

A similar picture is emerging in East London, with average rents for small industrial properties rising to £25 per square foot in the third quarter, up 47 per cent year-on-year.

The Covid-19 pandemic has “accelerated industrial and logistics markets by five years” thanks to an explosion in demand for online shopping, Tom Kennedy, an associate at Knight Frank, told CNBC.

The rise of dark supermarket companies in 2021 has contributed significantly to price pressures in London, he added. “They’ve hit our industrial market hard in that inner city, so rents have gone up massively.

“It’s been a huge arms race for space and only certain areas of London are right for them. So, in turn, has created bidding wars.”

Another real estate company, Savills, says it is noticing a similar trend. According to a presentation shared by the company, demand for properties larger than 500,000 square meters has dropped this year, while the use of facilities under 200,000 square meters has spiked.

Remarkable, Amazon Savills says it has increased acceptance of buildings under 200,000 square feet to 64% over the past year, showing that quick grocery apps aren’t the only players impacting the market. .

“They’re part of the industry. They’re a force in it. But I wouldn’t say they’re the driving force,” Toby Green, Savills’ director of logistics and industry group, told CNBC.

He said other areas driving demand include data centers, dark kitchens and parcel delivery.

However, Green thinks fast delivery players are having an impact. They are “creating an additional layer of demand,” he said, and some companies are even willing to pay higher prices for “last mile” facilities that focus on fast shipping.

“It’s a somewhat opaque market,” Green said. “There will be less transparency in transactions. There will be one-time transactions. They will be prepared to pay a larger fee per square meter to have a certain facility in a single location. determined.”

Industry executives and investors say that “hyper-localization” is the key to rapid commercial success. Companies are racing to take up space as close to their customers as possible.

“We think it’s a fundamental trend based on consumer behavior,” Andrew Gershfeld, a partner at Flint Capital who invested in grocery app Jiffy in London, told CNBC.

Investors in instant grocery apps say they operate cheaper than brick-and-mortar stores because they take up less space, don’t require in-person visits, and have good insights. more about their inventory.

“Property prices are really a rounding error,” Alberto Menolascina, head of British instant grocery delivery company Gopuff, told CNBC. “If you think about the revenue that can be generated on a site-by-site basis, real estate is never really a big expense.”

But costs can add up quickly. For example, many fast-grocery services treat couriers as salaried employees, unlike “gig economy” platforms such as Deliveroo which designates them as independent contractors with less interest.

“The main problem with the dark shop services right now is [they need] to reduce pick-up and packaging times for orders,” Andrey Podgornov, CEO and co-founder of retail technology company Qvalon, told CNBC.

Companies also need to buy stock from wholesalers to fill their inventory. Commercial rent inflation could put additional cost pressures on dark store companies.

Express delivery companies “tend to start in cheaper areas, but then once they move into richer regions,” said John Mercer, global head of research at analytics firm Coresight. yes, they obviously need to pay for the property.”

“As companies try to move into more upscale spaces and cities, they pay more for the real estate they buy.”

Rising inflation is the story of 2021 for investors, who worry the global economy could overheat as demand for services surges higher after countries lifted restrictions. Covid-19.

The logistics market is already tight due to supply chain disruptions, Green said. Following the closure, demand for smaller industrial units is now “stronger than ever.”

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