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World NewsRapid delivery 'arms race' drives up London commercial property rents

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

A employee fulfills orders at a Gorillas “dark store” in London’s stylish Shoreditch district on May 20, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON — A battle to seek out area powering the ultrafast grocery delivery increase is pushing up rents in elements of London’s commercial property sector.

Companies like Getir, Gorillas and Zapp, which promise to ship important items to individuals’s doorways in a matter of minutes, have swept throughout the U.Ok. capital this 12 months.

Such providers depend on so-called “dark stores,” small warehouses used to arrange on-line grocery orders for delivery. Similar to darkish kitchens on the planet of meals delivery, these amenities do not serve prospects in-store.

Real property brokers say they’ve seen common commercial rents climb in prime London areas due to an inflow of demand from speedy grocery delivery corporations.

In West London, prime rents for small industrial items of about 20,000 sq. toes rose to £35 ($46) per sq ft within the third quarter of 2021, up 75% from the identical interval a 12 months in the past, in accordance with figures shared by property brokers Knight Frank.

An analogous image is rising in East London, with common rents for small industrial properties climbing to £25 per sq ft within the third quarter, up 47% year-over-year.

The Covid-19 pandemic had already “accelerated the industrial and logistics market by five years” due to a ensuing increase in demand for on-line buying, Tom Kennedy, an affiliate at Knight Frank, advised CNBC.

The rise of darkish grocery store corporations in 2021 has contributed considerably to cost pressures in London, he added. “They’ve hit our industrial market hugely in that inner-city zone, which in turn has increased the rents massively.

“It’s an enormous arms race for area, and there is solely sure areas in London that work for them. So that, in flip, has created bidding wars as properly.”

Another real estate company, Savills, said it was seeing a similar trend. Demand for properties spanning more than 500,000 sq ft has waned this year, according to a presentation shared by the firm, while take-up of facilities under 200,000 sq ft has spiked.

Notably, Amazon has increased its take-up of sub-200,000 sq ft buildings by 64% in the past year, Savills said, showing that rapid grocery apps aren’t the only players impacting the market.

“They are one a part of the sector. They are a drive inside it. But I would not say they’re the driving drive,” Toby Green, director of Savills’ industrial and logistics team, told CNBC.

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

Still, Green thinks rapid delivery players are having an impact. He says they’re “creating an additional layer of demand,” and that some firms are even willing to pay a higher price for “last-mile” facilities focused on speedy shipping.

“It’s a barely opaque market,” Green said. “There will likely be much less transparency within the offers. There will likely be one-off offers. They will likely be ready to pay a bigger per-sq-ft fee to get a sure facility in a sure location.”

Industry executives and investors say that “hyper localization” is key to success in the quick grocery delivery market. Companies are racing to occupy space that’s as close to their customers as possible.

“We suppose it’s a basic development that’s based mostly on client habits,” Andrew Gershfeld, a partner at Flint Capital who’s invested in London grocery app Jiffy, told CNBC.

Investors in rapid grocery apps say they’re cheaper to run than traditional stores since they take up less space, don’t need customers to enter in-person and have better insights into their inventory.

“The price of actual property is actually a rounding error,” Alberto Menolascina, head of U.K. at instant grocery delivery firm Gopuff, told CNBC. “If you consider the income that may be generated on a per-site foundation, actual property isn’t actually the massive price.”

But the costs can add up quickly. Many rapid grocery services treat couriers as salaried workers, for example, unlike “gig economic system” platforms such as Deliveroo which designates them as independent contractors with less benefits.

“The principal downside for darkish retailer providers proper now could be [they need] to lower their choosing time and packaging time for orders,” Andrey Podgornov, CEO and co-founder of retail tech firm Qvalon, told CNBC.

The companies also need to buy stock from wholesalers to fill up their inventories. Inflation in commercial rents could further add to the dark store firms’ cost pressures.

Rapid delivery firms “have a tendency to begin off in cheaper areas,” said John Mercer, global head of research for analysis firm Coresight, “however then as soon as they transfer into extra prosperous areas, they clearly have to pay up the true property.”

“As corporations do try to maneuver into extra premium areas and cities, they need to pay extra for the true property they take.”

Rising inflation has been the story of 2021 for investors, who worry the global economy may be overheating as demand for services ripped higher after countries wound back Covid-19 restrictions.

The logistics market was already experiencing tightness due to supply chain disruptions, Green said. Post-lockdown, demand for smaller industrial units is now “stronger than ever.”

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