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

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An order is fulfilled by a Gorillas worker at the “dark shop” located in London’s trendy Shoreditch on May 20, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON — A battle to find space powering the ultrafast grocery delivery boom is pushing up rents in parts of London’s commercial property sector.

Zapp and Gorillas, companies that promise essential goods delivery in minutes have made their way across London this year.

This service relies on what are known as “dark store”, which is a small warehouse that processes online orders. This is similar to food delivery companies that use dark kitchens, but these services don’t offer in-store service.

Agents in real estate say that average rents have risen in prime London areas due to increased demand from fast grocery delivery companies.

In West London, prime rents for small industrial units of about 20,000 square feet rose to £35 ($46) per sq ft in the third quarter of 2021, up 75% from the same period a year ago, according to figures shared by estate agents Knight Frank.

A similar picture is emerging in East London, with average rents for small industrial properties climbing to £25 per sq ft in the third quarter, up 47% year-over-year.

Knight Frank associate Tom Kennedy stated that Covid-19 had “accelerated the industry and logistics market by 5 years” because of a boom in internet shopping.

He said that the rise in dark supermarkets companies in London in 2021 has significantly contributed to London’s price pressures. “They have impacted our industrial market in the inner-city area, which in turn has raised rents dramatically.

It’s an arms race for space and only certain parts of London work well for it. This has led to bidding wars.

Savills said that another real estate firm was experiencing a similar trend. The firm shared a presentation that showed how the market for larger properties than 500,000sq ft had declined in this year. However, it reported that there has been an increase in demand for smaller facilities, which are less than 200,000sq ft.

Notably, AmazonSavills reported that the company has seen a 64% increase in take-ups of buildings under 200,000 square feet over the last year. This shows that not only are rapid grocery apps impacting the market, but also other players like Airbnb and Uber Eats.

“They make up one half of this sector. They’re a driving force in it. They are a force within it, but I would not say that they drive the business,” Toby Green of Savills’ Industrial and Logistics team told CNBC.

Other sectors that are driving growth in demand include dark kitchens, parcel delivery and data centers.

Green believes rapid delivery companies are still having an effect. Green says that they are “creating an additional layer of demand” and some companies will even pay more for last-mile facilities that focus on fast shipping.

Green stated that it was a somewhat opaque market. The deals will have less transparency. These deals are not going to be repeated. To get certain facilities in certain locations, they will pay more per square foot.

According to industry leaders and investors, “hyperlocalization” is essential for success in quick grocery delivery markets. Space is becoming more scarce for companies who want to be as near as possible to customers.

CNBC spoke with Andrew Gershfeld of Flint Capital, who is part of the partnership that invested in Jiffy London’s grocery app.

Investors in quick grocery apps claim they are more cost-effective than traditional retail stores because they require less space, have better insight into inventory and do not need customers.

Alberto Menolascina of Gopuff U.K., said that the cost of real property is a “rounding error.” Real estate has never been a big expense when you consider the potential revenue per-site.

The costs of these services can be high and they are not cheap. Many couriers who use rapid grocery services are considered salaried employees. This is in contrast to other “gig economy” platforms, such as DeliverooThis designates them independent contractors, with less benefits.

“The biggest problem with dark store services at the moment is [they need]”To decrease their picking and packaging times for orders,” Andrey Podgornov – CEO and cofounder of Qvalon retail tech company – told CNBC.

Wholesalers are also required by the businesses to replenish stock. The cost pressures for dark-store firms could be further increased by inflation in commercial rents.

John Mercer from Coresight Global Head of Research, said that rapid delivery companies “tend not to start in lower areas.” However, once they have moved into higher-end areas they will need to make the property more affordable.

As companies try to expand into premium areas, and to live in more cities, it is necessary to spend more on the property they rent.

Inflation is the main concern for 2021 investors. They worry about the overheating global economy as the demand for services has risen after Covid-19 bans were lifted.

Green explained that supply chain disruptions had already caused tightening in the logistics market. The demand for small industrial units has increased after the lockdown.

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