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Logistics to continue being commercial property’s growth engine

By Rael Levitt, CEO of Inospace

Industrial real estate – especially that chunk of it devoted to logistics – has been, and will continue to be, the hottest segment of the commercial property market. The dynamics driving the surge, including e-commerce and supply chain constraints that are now encouraging the growth of “just in case” instead of “just in time” use of warehouses, will be around long after the pandemic has finally faded away.

Last-mile logistics is defined as the final step where a package arrives, in the end-user/customer journey, from the factory through distribution channels. Logistics has become integral in every aspect of our economy and a critical component in the functionality of commercial real estate.

It became a disruptive force with the rise of online retail in the mid-2000s, and now, Covid-19 has further highlighted how it is systemic to all aspects of our economy, including real estate.

Inospace, South Africa’s largest business and logistics park owner and operator, was built on the strength of e-commerce positioned industrial spaces. The pandemic amplified how the supply chain is integral to our real estate DNA and subsequently influences metrics across all commercial property types — not only retail and industrial.

World War II is the quintessential historical example underscoring the significance of the supply chain. Troops and supplies had to move great distances across varied geography at a speed unevenly matched with the infrastructure of the time because there were no highways or container ports like there are today. Railroads became the ‘essential mile’ in the supply chain for the war effort — the precursor to today’s last mile. Fast forward three-quarters of a century, logistics and supply chains are more global in nature with greater demands on capacity and speed to reach the all-important last mile.

An appreciation for the interconnectivity of supply chain links is integral to understanding the overall impact of last-mile logistics on commercial real estate. Before the Takealot or Checkers Sixty60 courier arrives at your home or office, a lot has transpired to reach that ‘last mile’.

Raw materials and components are moved to factories to manufacture or create products. Finished goods are then sent through seaports and cargo-centric airports to distribution warehouses. Upon arrival, inventory is sorted and delivered via courier, express, or parcel delivery services. Think of this process as a relay race. Each supply chain ‘athlete’ needs to run their segment at peak performance and then hand over the package to the next segment without dropping it. As Walmart (owner of South Africa’s Massmart) defined in 2017, last-mile logistics is an on-time and in-full (OTIF) process. Logistics real estate is the track upon which this relay race plays out.

During the pandemic, the expansion of e-commerce activity, to include everything from toilet paper to cars, has dramatically advanced last-mile logistics. We are still a long way from the end of the logistics boom. While it is generally recognized that the pandemic moved e-commerce forward exponentially, we have yet to appreciate the degree of change that has occurred and that still lies ahead.

For example, Takealot has followed US giant Amazon to become the ‘everything retailer’ with sales that have surged during the pandemic period. However, online retailers have disrupted the way we consume and re-envision commercial real estate assets.

The term ‘logistics’ conjures e-commerce, warehouses, and delivery images. However, it is crucial to understand the many different layers and nuances of logistics. The topic of logistics no longer fits neatly into just the box of the industrial sector. Logistics are the arteries that direct materials and merchandise flow to the vital elements of our economy. This logistics and last-mile delivery evolution creates ripple effects broadly felt across the property types. Logistics now influences the ‘where’ and ‘why’ of site selection for all property types.

Gone are the days when housing needed to be located near essential merchandise through grocery stores and shopping centres. Thanks to the evolution of a ‘shop-online-and-deliver-to-me’ economy, people can live further from physical retail stores. Going a step further, the combination of remote-work technology, housing affordability, and last-mile logistics has the potential to disrupt demand and location strategies for offices, as well.

While some companies will go back to large office blocks, many won’t. Large office space users are being challenged to rethink their needs. As a result, office investors may be forced to reprice their office assets based on the post-Covid-19 rethinking of office work. Suburban and secondary markets may become the next-generation office of choice for office building investing, emphasizing smaller, more horizontal office building designs — such as repurposed malls and single-story 1980s vintage office parks.

Last-mile logistics has surged to the forefront in the restaurant sector, too. With the pandemic fueling a significant shift to online ordering, restaurants embraced digital apps and delivery, forcing them to reevaluate site-selection criteria to focus on delivery and curbside pickup.

The ability to process disruption is required to support modern-day logistics’ fast-moving, high-volume requirements in the ‘buy-online-and-deliver-to-me’ era.

The shift in last-mile logistics could even impact hotels. Will the hotel of tomorrow even need to have banquet and meeting facilities? Why invest in on-site food service for catering or room service requests when Uber Eats or Bolt can offer more choices along with fast, convenient service to guests? Last-mile logistics can also enable alternative hospitality models. Why not host meetings and events in non-traditional venues, such as a park, versus the traditional convention centre or hotel?

The apparent target for logistics disruption is in the retail sector. Synergies are driving change within the retail industry, such as leveraging that last-mile network for more cost-efficient fulfilment and reverse logistics — the return of goods through the supply chain. Retailers adopt an “if you can’t beat ’em, join ’em” mentality, offering in-store package pickup or return locations.

Ultimately, last-mile logistics create a ripple effect beyond industrial to include all property types. It will continue to be the growth engine of the commercial real estate world.