Last mile costs - the rental reality

Tim Harrup

Within the world of real estate, the location and cost of logistics centres is often a topic. This element of the supply chain is, however, only one of many that logistics operators have to take into account. Cushman & Wakefield, in conjunction with P3 logistics Parks, has produced a report called ‘Last Link – Quantifying the Cost’ which considers all the cost factors in play, and in particular in view of the increasing proportion of e-commerce which logistics operators have to handle. The authors talk of the ‘Total Last Link Cost’, saying that this takes into account all of the variables that contribute to last link cost for any property. And having the right final depot is important because ‘surveys show that consumers across Europe overwhelmingly prefer home delivery over other delivery methods’.

In terms of individual logistics cost centres, the report goes on to point out that while transportation accounts for half of total logistics costs, real estate’s share is relatively small (between 4 and 5%). The location of a last mile depot, however, impacts on costs. Located within proximity of delivery points inside Europe’s major conurbations, urban depots typically command higher rents than distribution warehouses, says the report, which suggests that real estate’s share of total last link costs surpasses its 4-5% of total logistics costs. But this is not bad news: ‘despite higher rents, urban depots achieve significant last link savings…’ The overall findings are quantified quite precisely where the distance (in time by road) between the urban depot and the first delivery point is concerned. Reducing this distance is said to be the most effective strategy to bring down total last link costs. The survey looked at data collected from London, Paris, Madrid and Milan. And the figures are impressive: an arbitrary 10 minutes closer drive-time from an average size urban depot to the first delivery point results in a saving of one million Euros per year.

Time to buy

Once again, however, the importance of the rental level in overall costs is extremely low. The report concludes that even in the case of inner-city urban depots, rents, that can account for a higher portion of last link costs, plays an almost insignificant role in total delivery costs. The rental premium paid by logistics operators in order to be within a maximum first delivery time of 30 minutes, it is explained, results in a tremendous benefit in reducing overall costs, while increasing overall customer satisfaction.

And where developers and landlords are concerned, the fact that rent is not significant in overall terms, means that strong rental growth potential for last link depots exists. And this puts logistics in the same revenue ball-park as traditional urban land uses. So what should developers do? ‘Current market feedback suggests that most developers still lack rental comparables to adequately underwrite the purchase of expensive industrial zone plots close to cities. At the same time, demand from e-retailers and 3PL (logistics operators) for just such locations, is increasing. This paradox will end as soon as more developers/investors accept the risk to speculatively purchase these sites at prices that, until now, were only affordable to developers of other asset classes.’