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

A worker fulfills orders in a Gorillas “dark store” in London’s trendy Shoreditch district on May 20, 2021

Hollie Adams | Bloomberg | Getty Images

LONDON – A battle for space fueling the boom in ultra-fast grocery deliveries is driving rents high in parts of London’s commercial real estate sector.

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

Such services rely on so-called “dark stores”, small warehouses in which online food orders are prepared for delivery. Much like dark kitchens in the grocery delivery world, these facilities do not serve customers in-store.

Real estate agents say the average commercial rents in prime London locations have increased thanks to demand from fast food delivery companies.

In West London, prime rents for small industrial units rose from about 20,000 square feet in the third quarter of 2021 to £ 35 ($ 46) per square foot, 75% more than the same period last year, according to real estate agent-shared figures Ritter Frank.

A similar picture emerges in East London, where average small industrial property rents climbed to £ 25 per square foot in the third quarter, up 47% year over year.

Thanks to the resulting boom in demand for online shopping, the Covid 19 pandemic has “already accelerated the industrial and logistics market by five years,” Tom Kennedy, Associate at Knight Frank, told CNBC.

The rise of dark supermarket companies in 2021 has contributed significantly to price pressures in London, he added. “They hit our industrial market in this inner city zone massively, which in turn has massively increased rents.

“It’s a big arms race for space and there are only certain areas in London that work for them. That in turn has led to bidding wars.”

Another real estate company, Savills, said it was seeing a similar trend. According to a presentation by the company, demand for properties larger than 500,000 sq ft has declined this year, while the use of facilities below 200,000 sq ft has increased.

Notably, Amazon increased the use of buildings less than 200,000 square feet in the past year by 64%, Savills said, showing that rapid food apps aren’t the only players influencing the market.

“You are part of the sector. You are a force in it. But I wouldn’t say they’re the driving force, ”Toby Green, director of Savills’s industrial and logistics team, told CNBC.

He said other sectors that are driving demand include data centers, dark kitchens, and package delivery.

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

“It’s a somewhat opaque market,” said Green. “There will be less transparency in the deals. There will be one-time deals. You will be willing to pay a higher price per square meter to get a certain facility in a certain location.”

Industry executives and investors say “hyperlocalization” is key to being successful in the fast food delivery market. Companies are racing to occupy spaces that are as close to the customer as possible.

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

Investors in rapid food apps say they are cheaper to run than traditional stores because they take up less space, don’t have to go in person, and have better visibility into their inventory.

“The cost of real estate is really a rounding error,” Alberto Menolascina, UK manager at Gopuff, the instant grocery supplier, told CNBC. “When you think of the revenue that can be generated per location, real estate is never really the big cost.”

But the costs can add up quickly. For example, many fast food services treat couriers as employees, as opposed to “gig economy” platforms like Deliveroo, which they refer to as independent contractors with fewer benefits.

“The main problem for dark store services is currently [they need] to reduce their order picking and packing time, “Andrey Podgornov, CEO and co-founder of retail technology company Qvalon, told CNBC.

Companies also need to buy inventory from wholesalers to replenish their stocks. The inflation of commercial rents could further increase the cost pressure of dark store companies.

Fast delivery companies “usually start in cheaper areas,” said John Mercer, global research director for analyst Coresight, “but when they move to more affluent areas, of course, they have to pay for the property.”

“As companies try to move to more premium areas and cities, they have to pay more for the properties they take.”

Rising inflation was the story of 2021 for investors worried the global economy is overheating as demand for services soared after countries lifted Covid-19 restrictions.

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