Quick-delivery ‘arms race’ drives up rents for commercial properties in London

A worker fills orders at a Gorillas ‘dark store’ in London’s trendy Shoreditch on May 20, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON – A battle for space fueling the super-fast grocery delivery boom is pushing up rents in parts of London’s commercial property sector.

Companies like Getir, Gorillas and Zapp, which promise to ship essential goods to people’s doors in minutes, have taken over the British capital this year.

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

Estate agents say they have seen average commercial rents soar in top London locations thanks to a surge in demand from fast grocery delivery companies.

In west London, prime rents for small industrial units of around 20,000 square feet rose to £ 35 ($ 46) per square foot in the third quarter of 2021, up 75% from the same period it a year ago, 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 climbing to £ 25 per square foot in the third quarter, up 47% year-over-year.

The Covid-19 pandemic had already “accelerated the industrial and logistics market by five years” thanks to a resulting boom in demand for online shopping, Tom Kennedy, partner at Knight Frank, told CNBC.

The rise of black supermarket businesses in 2021 has contributed significantly to price pressures in London, he added. “They impacted our industrial market in this downtown area tremendously, which in turn drastically increased rents.

“It’s a big arms race for space, and there are only certain areas in London that work for them. So that has also created bidding wars.”

Another real estate company, Savills, said it was seeing a similar trend. Demand for properties spanning over 500,000 square feet has declined this year, according to a presentation shared by the company, while support for facilities under 200,000 square feet has increased.

Notably, Amazon has increased its support for buildings under 200,000 square feet by 64% over the past year, Savills said, showing that fast grocery apps aren’t the only players impacting the market.

“They’re part of the industry. They’re a force within it. But I wouldn’t say they’re the driving force,” Toby Green, manager of the industrial and logistics team at Savills, told CNBC.

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

Still, Green believes the players in rapid delivery are having an impact. He says they “create an extra layer of demand” and some companies are even willing to pay a higher price for “last mile” facilities geared towards fast shipping.

“It’s a slightly opaque market,” Green said. “There will be less transparency in the agreements. There will be one-off agreements. They will be willing to pay a higher rate per square foot to get a certain facility in a certain location.”

Industry executives and investors say “hyper-localization” is the key to success in rapid commerce. Companies are eager to occupy a space as close as possible to their customers.

“We believe this is a fundamental trend based on consumer behavior,” Andrew Gershfeld, partner of Flint Capital who invested in the London-based grocery app Jiffy, told CNBC.

Investors in fast grocery apps say they’re cheaper to run than traditional stores because they take up less space, don’t need customers to come in person, and have a better idea of ​​their inventory.

“The cost of real estate is really a rounding error,” Alberto Menolascina, UK director of instant grocery delivery company Gopuff, told CNBC. “If you think about the income that can be generated per site, real estate is never really the big cost.”

But the costs can add up quickly. Many fast grocery stores treat couriers as salaried workers, for example, unlike “gig economy” platforms such as Deliveroo which designate them as independent contractors with fewer benefits.

“The main problem with dark store services right now is [they need] to reduce their time to prepare and pack orders, “Andrey Podgornov, CEO and co-founder of retail technology company Qvalon, told CNBC.

Businesses must also purchase inventory from wholesalers to fill their inventory. Inflation of commercial rents could further increase the pressure on the costs of dark store companies.

Fast delivery companies “tend to start in cheaper areas,” said John Mercer, global head of research for analytics firm Coresight, “but once they move to richer areas , they obviously have to pay for real estate “.

“As companies try to locate in more luxurious spaces and cities, they have to pay more for the real estate they take. “

Rising inflation has been the story of 2021 for investors, who fear the global economy could overheat as demand for services increased after countries lifted restrictions on Covid-19.

The logistics market was already under strain due to supply chain disruptions, Green said. After the lockdown, demand for small industrial units is now “stronger than ever”.

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