The growth in health care, e-tailing and omni-channel retailing has been a major driver of the increased demand for logistics distribution centres.

The growth in health care, e-tailing and omni-channel retailing has been a major driver of the increased demand for logistics distribution centres – which is seeing the emergence of new property types for investors.

Take the United States for example, where net demand for warehousing has been elevated for the last four years at approximately 260 million (sqf) per annum or 2.1% of total market stock. E-commerce and retailing represents approximately 18% of all warehouse demand and 40% of all logistics demand.

As demand increases and tenants look to improve supply chain efficiencies, two new types of warehousing are proving to be in demand and evolving:

1. The emergence of smaller “Last Touch” distribution centres

With the growth in e-tailing and the problem of the “last mile” logistics (movement of goods from a transportation hub to the final delivery destination), demand for these buildings is growing rapidly. Given the lack of available land and zoning constraints, these buildings are typically not purpose built. Located in urban infill locations in major cities, they are older buildings that have to be refurbished and adapted for the distribution of goods, which is far from ideal. Truck and light vehicle access is usually poor and inefficient, with low ceiling heights not providing for efficient racking systems.

2. The emergence of the modern fulfilment centre

Modern fulfilment centres are very large distribution and logistics warehouses. They are typically located on the outskirts of cities, where large tracts of land are available near major arterial roads. The buildings are typically constructed with concrete tilt-up wall panels, minimum 32 feet (10 metre) ceiling height, laser levelled seven-inch concrete flooring, sprinkler systems and storm water collection systems. The centres can have up to 1.2m (sqf) of lettable area (that is equivalent to 28 football fields). The centres usually specialise in either combined or specialised small and large parcel sorting, or large parcel non-sortable centres. Small parcel sorting centres can ship up to 15 million items per annum.

In Amazon’s latest generation of fulfilment centres, they have introduced the automated robotics Kiva System combined with eight miles of conveyor belts and a mezzanine floor. The system is made up of robots (automated guided vehicles) that locate and retrieve portable storage units, to deliver goods to human pickers that package the goods and place the package on a conveyor belt where it is automatically labelled and barcoded and directed to the relevant dispatch chute. A fulfilment centre can have over 2,000 robots operating at any one time. The robots come in two sizes with the larger size lifting up to 3,000 pounds. They can travel at 1.3 meters per second. The robots are battery powered and will go and self-dock to be charged for 5 minutes every hour. Even with the automated robotics systems, the large fulfilment centres still need to employ up to 1,800 staff.


The value proposition for investors

The actual construction of a fulfilment centre is not expensive when compared to other types of real estate such as office buildings and shopping centres. While build costs do vary by country and state, in the US the base build cost is approximately $75 (psf). The build times are also much faster than the construction of office buildings and shopping centres. On a flat reticulated site, a fulfilment centre can be constructed in as little as six months.

The fit-out of modern fulfilment centres actually costs materially more than the building itself. The fit-out costs of an Amazon fulfilment centre in the US can cost up to $150 (psf), or $180m in total. In most instances the cost of the fit-out is borne by the tenant. The tenant will own the fit-out, and due to the large capital cost the lease lengths tend to be long, with 15 year leases not uncommon. The leases tend to have contracted fixed, or cpi (consumer price inflation) linked, annual rental increases. All operating and maintenance costs for the building are typically paid by the tenant.


The pitfalls to watch out for

When looking to take advantage of the strong demand for supply chain logistics, by investing in buildings that are an integral part of the supply chain, clear distinctions need to be made. In areas where zoned land is readily available, barriers to entry can be low; the relatively cheap build cost allows for supply to easily increase which can restrict market rental growth. The ease of which new supply can be developed, leads to greater older building obsolescence, affecting the rentability of older stock as new modern buildings come online. As a city’s dynamics change, so can the demand for supply chain logistics. For example take the auto manufacturing industry. As demand for lower maintenance electric vehicles increases versus higher maintenance combustion engine vehicles, the demand for supply of auto parts decreases, leading to higher vacancy rates in distribution centres, as auto parts and suppliers shrink their tenanted footprint.

In areas located closer to city centres where population density increases, the availability of land reduces, land values increase, and so do the barriers to entry. Higher barriers to entry materially reduce the ability for new supply to compete with existing buildings. This leads to reduced older building obsolescence, higher market occupancy rates and, ultimately, greater rentability and higher market rental growth driving superior total returns. In these locations in dense cities like Tokyo and Hong Kong, where land values are very high, we are starting to see the emergence of multi-story distribution warehouses with raised external driveways for 17 metre trucks cascading up the buildings. If e-tailing and omni-channel retailing continues its growth trajectory and land values continue to increase in the world’s major cities as is predicted, it shouldn’t be long before multi-story distribution centres start appearing in other major cities around the globe.


Important information

This document is not a financial promotion and has been prepared for general information purposes only and the views expressed are those of the writer and may change over time. Unless otherwise stated, the source of information contained in this document is First State Investments, and is believed to be reliable and accurate.

References to “we” or “us” are references to First State Investments.

First State Investments recommends that investors seek independent financial and professional advice prior to making investment decisions.

In the United Kingdom, this document is issued by First State Investments (UK) Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.