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The future of last-mile infrastructure

The digitalisation of the retail industry has revolutionised traditional commerce, which has been further realised and accelerated by the COVID-19 pandemic. 

Consumers are increasingly exchanging in-store experiences for online shopping. However, the expectation of instant gratification remains – consumers demand cheap and fast delivery options. As a consequence, the distribution of goods in urban areas has emerged as a key energy consumer and one of the main sources of air pollution and noise.

Last-mile delivery, commonly defined as the ‘last stretch of a business-to-consumer parcel delivery service’, helps to mitigate these effects, as ‘e-tailers’ implement logistical solutions by securing warehouse and distribution space to house their inventory as close as possible to their customer base.

As such, the negative narrative with regard to retail real estate (namely, the closure of shopping centres) is being transformed by way of last-mile redevelopment opportunities. Demand for last-mile property has recently spiked with the desire for quick, efficient delivery of goods to consumers, together with the increased cost of operating in inner city areas where land supply is limited, resulting in the increased use of automation and changing building designs.

Europe is currently leading the way with regard to last-mile logistics through the conversion of underutilised retail and parking spaces to last-mile fulfilment centres, foreshadowing similar opportunities for Australia’s infrastructure industry.

Last-mile delivery initiatives around the world

1. London, England – Amazon’s Last Mile Logistic Hub

Amazon Logistics will soon commence construction of its next-generation ‘Last Mile Logistic Hub’ which will convert 39 parking spaces in the London Wall Car Park into a distribution hub. The online shopping giant is expected to make all deliveries within a 2 km radius of the hub on foot or by e-cargo bikes, eliminating the need for motorised freight vehicles.

The initiative was approved by the City of London Corporation’s Planning and Transportation Committee, and forms part of its commitment to reduce the impact of motorised freight to improve local air quality and meet net zero carbon emission targets by 2040. The City of London Corporation aims to deliver two additional Last Mile Logistics Hubs by 2022, and a further five by 2025.

2. Prague, Czech Republic – Depot.Bike

A similar scheme called Depot.Bike, which involves a range of logistics companies including DHL Express, Dachser, PPL, DPD, GLS, CCCB partner MessengerCZ and Rohlik.cz (the country’s largest online grocery store), is currently in its pilot phase in Prague. Depot.Bike aims to alleviate the demand on freight vehicles (with a corresponding benefit for congestion and infrastructure) as a result of the rapid increase in home-deliveries during the COVID-19 lockdown and the city administration’s efforts to relieve public space, particularly in the city centre.

3. Leipzig/Halle, Germany, California and Cincinnati/Kentucky, United States – Amazon’s Air Hub

Amazon recently started operations at its first Amazon Air Hub, based out of the Leipzig/Halle Airport in Germany – a 20,000 square metre cargo facility to enhance Amazon’s fulfilment network in Europe, facilitating greater flexible delivery options at lower prices. The retail giant’s last-mile project pipeline includes Air Hub expansion to San Bernardino International Airport in California and Cincinnati/Northern Kentucky International Airport in 2021.

In particular, the Cincinnati/Northern Kentucky project includes the construction of a new ramp for aircraft parking, vehicle parking lots and a sortation building, as well as local roadway improvements, comprising a $1.5 billion investment.

Australia’s current position

Australia’s vast landscape presents acute and unique challenges to the last-mile industry. The large size of the country, coupled with the creation of second CBDs (for example, Parramatta in Sydney) reinforces the wide spread of Australia’s population. To this end, the ideal last-mile location is not necessarily inner city, with Australia’s first multi-storey industrial development likely to be in the South Sydney precinct next year, followed by a facility in Port Melbourne within the next five years.

Multiple suburban locations to address the sprawling population would mirror the micro-fulfilment model being trialled by supermarket giant Woolworths, which involves the setup of ‘mini distribution centres’ in existing stores to deal with online order demand.

It is clear that Australian retailers are lagging behind the rest of the world, relying on historical delivery processes and technology. However, opportunities have recently arisen for private last-mile redevelopments. In 2019, global real estate investment group ESR sold a large industrial landholding in Melbourne’s south east to developer, HB+B Property, for A$19.75 million. The 39,760 square metre site has the potential to become a last-mile delivery hub, in line with similar facilities being developed in the area.

Retail to industrial: the impact of last-mile on commercial real estate

In commercial real estate, the e-commerce phenomenon has created new demand for logistics infrastructure. Existing industrial real estate, including warehouses, industrial facilities and regional distribution centres, is often not specifically designed for the purposes of e-commerce, on account of its low ceiling heights, inadequate loading dock infrastructures and insufficient durability to support substantial floor loads and heavy wear and tear.

Accordingly, retail-to-industrial property conversions are anticipated. Underperforming retail sites and dilapidated parking lots, often located within city centres, have become an ideal location for last-mile hubs given they are connected to utilities, have large parking lots with multiple points of ingress and egress, existing dock doors and clear heights compatible with industrial use. By way of example, Amazon has recently demolished the Randall Park Mall and the Euclid Square Mall in Cleveland, Ohio and built distribution centres on the site, transforming the retail space into 28,000 square metres of industrial space. However, in Australia, the supply of these sites is decreasing on account of rezoning, usually to residential uses.

This has given rise to an abundance of investment activity in the industrial real estate sector leading to intense competition for scarce individual properties. Blackstone, in an effort to grow its ‘existing warehouse and logistics portfolio to meet the growing e-commerce demand’, recently acquired a portfolio of 13,000 warehouse properties in the US for US$18.7 billion. Notably, ESR recently agreed a deal to acquire Blackstone’s A$3.8 billion Australian warehouse portfolio, Milestone Logistics, in the biggest direct property transaction in Australian history.

Conversion efforts are also expected to rise in the service/fuel station industry, as electric vehicles increasingly reduce the need for fuel pumps, relinquishing retail space in urban areas and city centres. Last month, British fuel retailer EG Group sold, and leased back, nine of its Woolworths Group Caltex petrol and retail convenience assets for A$54.5 million, possibly with a view to converting these to last-mile delivery centres. This presents an opportunity for similar landowners to leverage prime location retail assets in a more effective and economic manner, converting these spaces to last-mile assets to capitalise on the drive for such facilities.

Looking to automation

Automating the last mile, with a view to achieve contactless delivery in a post COVID-19 world, has recently emerged as a viable objective, despite significant hurdles to overcome.

The majority of trials of autonomous last-mile delivery robots are conducted in fair-weather locations. Outdoor deliveries will challenge robots or drones with snowy or rainy conditions. Further, municipalities will regulate the use of robots on city sidewalks. For example, in December 2017, delivery robots were prohibited in San Francisco due to the threat of personal injury they may inflict on pedestrians, forcing companies to test their robots in other cities. In 2019, Switzerland suspended a drone delivery program by Swiss Post, after one of its vehicles crashed near a group of small children.

Human judgement regarding where a package should be delivered is also eliminated – sometimes packages should be delivered to the end of a long drive way, sometimes to the front door of a house and sometimes to a high-rise apartment. One solution is for last-mile delivery companies to require a human receiver. For example, Starship’s robots only unseal when the receiver uses the smartphone app to open it, and Amazon’s Scout asks that people take the package out themselves. The assertion that the rise of autonomous vehicles will eliminate the traditional delivery driver is often overstated. Although it follows that the risk of job loss from automation is expected, it is likely that jobs will be transformed to enhance automation, including maintenance and servicing, as well as the loading and unloading of cargo. For example, Woolworths’ 22,000 square metre fulfilment centre, currently under construction in Auburn, NSW, will employ around 250 people on its planned completion in 2024.

Fully-autonomous delivery systems also give rise to considerations of data security and privacy. Sensitive information captured and stored by robotic features, such as cameras, may be subject to inappropriate sharing or usage, with obvious implications for individual privacy.

Despite these challenges, autonomous package delivery systems are gathering momentum, with Amazon, Google, FedEx and UPS developing and testing aerial drones and robots, equipped with sophisticated ‘sense and avoid’ technology to detect obstacles, and artificial intelligence software that recognises and learns from their surroundings to make decisions autonomously.

Amazon’s Scout navigates sidewalks at walking pace and delivers small parcels around residential areas in Southern California, Georgia and Tennessee, with UK-based trials underway. McKinsey&Company predicts that autonomous vehicles will make up 80% of last-mile deliveries by 2025.

Ultimately, the solution that delivers packages without human intervention will be the final step in revolutionising the struggling retail sector.


Authors

MCCAWLEY Penny SMALL
Penny McCawley

Senior Associate


Tags

Real Estate

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.

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