17 Jul 2019 4 min read

Urban Logistics: Externalities and Opportunity

By Bill Page

E-commerce is quick and convenient. Delivery is – normally – reliable. But few stop to think about the real estate required to service delivery requirements, or the environmental implications of our choices as consumers.


This week brought Amazon Prime Day, an event now so large it actually spans two days. At the rate online shopping is growing, the 2020 Prime Day may last a week.

E-commerce spending has grown at an average of 17% per annum over the past 10 years, according to ONS figures, and the proportion of goods bought online peaked at 22% of all retail sales last November. The commonly held view is that the faster a company can deliver goods, the better its service will be perceived.

The last mile of these deliveries – the final leg of the trip a package makes to its destination – can comprise over 40% of the total costs in the supply chain. ‘Urban logistics’ is the process of maximising the efficiency of this last mile and, given the rapid expansion of online retail, is also a burgeoning segment within the industrial property market. Few have elegantly defined this area – we regard it as industrial property located within an urban area used for distribution, measuring between 25,000 square feet and 75,000 square feet – but many believe it to be an exciting growth opportunity given the underlying market dynamics in e-commerce.

E-commerce operators need ever-more space to meet this demand for rapid delivery. They must ensure there is a sufficient variety of stock close to the consumer population, of course, but increasingly they also have to run even greater warehouses to deal with the volume of product returns – think of the nature of fast fashion. Prologis estimates that e-commerce logistics requires three times the floorspace of conventional logistics.

Speedier delivery also requires a larger fleet of vehicles because it becomes more difficult to combine loads. The more vehicles there are, the greater the associated congestion and pollution may be. In London, light-freight journeys are responsible for 80% of all freight miles. Transport for London estimates this will grow by 43% by 2030. On average there are 300-400 freight vehicle trips per 1,000 people per day and 30-50 tonnes delivered per person per year. Furthermore, London’s population is expected to grow by 1.5 million over the next 20 years: that’s 150,000 additional daily deliveries.

These externalities drive regulation. In many cases this is led from the European level, the most pertinent example being emission-based charging. In London, an ultra-low emission zone has been introduced in which larger vehicles pay £100 per day to enter the capital. Reports suggest Transport for London is making £220,000 per day from these charges – and they will come to a city near you soon.

Central location, macro location, micro location

So there are challenges for operators, but there are still opportunities for investors. Urban logistics property has returned an extra 1.3% per annum compared with conventional industrial property over the long term. This came with some more volatility, however, creating a question for portfolio construction. Historically, performance was also dominated by the South East but we expect the opportunity to spread in the future.

Although we have high conviction in the segment, current pricing commands an uncomfortable proximity premium. Over the long term, we think technology will soften this conviction over proximity thanks to efficiencies in routing, while the range of electric vehicles will also improve. We also think consumers will become more aware of the externalities and, presuming the ordering functionality is there, will actively choose more appropriate timings.

We expect that urban planners will increasingly encourage the smarter use of urban logistics too. Consolidation centres, where different operators can combine loads to make one delivery rather than several, are already successful albeit with more challenging management requirements. This trend will be supported by policy, with examples including store replenishment on Regent Street and the London Construction Consolidation Centre in East London. Both reduce the need for heavy goods vehicles, improve reliability, and reduce costs. They are likely to become a planning stipulation for more new buildings and districts.

Investors piling into urban logistics on the basis of ‘a central location above all else’ therefore risk overpaying. A careful consideration of both macro location (growing populations, supportive density, and improving consumer spending) and micro location (which side of the low-emission zone will be best for business?) is key for performance – and for reducing obsolescence risk.

There is a bright path for urban logistics, but we will need to tread carefully.

Bill Page

Head of Real Estate Markets Research

Bill is LGIM Real Assets' Head of Real Estate Research. He has responsibility for the formation of house views and inputs into fund strategy. He has 20 years’ industry experience. He is a voting member of the Real Estate Investment Committee and actively contributes to the platform’s office and industrial strategy.

Bill joined LGIM Real Assets in October 2012, having spent seven years at JLL where he was EMEA Head of Office Market Research. Prior to JLL Bill worked at Estates Gazette Group. He chaired the British Council for Offices’ Research Committee between 2015 and 2018 and sits on the IPF Research Steering Group.

Bill graduated from Lancaster University with a first class degree in geography. He holds the IMC certificate and IPF Diploma.


Bill Page