The Amazon parcel that arrives within two days is a feat of logistics.

Ireland’s Amazon packages usually come from one of Amazon’s 17 fulfilment centres in the UK. These giant warehouses are situated near motorways at the edge of big cities. They’re each around 700,000 square feet in size (ie, about the same size as Ireland’s biggest warehouse).

Online shopping isn’t just about slick apps and software. The Amazon app is useful because Amazon has sunk billions into building a physical logistics network. Amazon has one type of warehouse for small items, another for bulky items, another for breaking down packages into trucks, another for fast-selling items, another for seasonal items, another for last-mile delivery to people’s houses. 

A big logistics network makes online shopping more convenient, which entices more people to shop online, which in turn justifies a bigger investment in logistics. In this way, investment in logistics is accelerating. 

Thanks to accelerating online shopping, warehouses beside motorways are some of the best-performing investments of 2020. Blackstone, the world’s biggest private equity firm, has called logistics its “highest conviction” real estate investment. Blackstone spent $18 billion on a portfolio of US warehouses last year. And Segro, a REIT focused on warehouses in the UK, is up more than 160 per cent in the last four years. Segro is the rare REIT to have gone up in value since Covid-19. 

Ireland has a deficit of high-quality logistics buildings. And thanks to Brexit and Covid-19, much more of them are needed. Investment is pouring in. 

Demand in Ireland

Online shopping isn’t as big in Ireland as it is in the UK or the US. In 2019, 27 per cent of Irish consumer spending happened online, according to JP Morgan, compared to 52 per cent for the UK and 56 per cent for the US.

Maybe Irish people shop less online because it’s less convenient here. For example in Ireland, Amazon Prime customers get their packages within two days. In big American markets, Amazon delivers in less than an hour. In the UK, next-day delivery is standard for Prime customers. 

E-commerce in Ireland has had a chicken and egg problem. Ireland is not a big enough market to justify big up-front investments in logistics. But because online shopping isn’t as convenient as it is in big markets, people have been slow to grow their online spending.

Covid-19 and Brexit have come along and changed all that. Covid-19 in particular has had a huge impact on how Irish people spend their money. Live data from the banking app Revolut, published by the Department of Finance, shows online spend rose from about 25 per cent of spending to 50 per cent, and has stabilised at around the 40 per cent mark. 

Irish consumer spending has moved, suddenly, online

Covid-19 has changed how consumers spend their money, and on the other side Brexit has changed how companies invest. 

In the past, big companies optimised their logistics setups to cover a region like Northern Europe. This gave them economies of scale at logistics hubs, and better working capital due to lower inventories. 

That way of doing things doesn’t work if there’s paperwork and taxes at the border slowing everything down — the outcome which looks most likely at this stage of Brexit negotiations. 

“Previously companies wouldn’t have had logistics or distribution in-country,” says Marie Hunt of CBRE. “Brexit forced people to re-think that. Now they’re building in-country logistics in order to preempt customs and tariffs.”

The net result is that stuff which might once have been stored in a Tesco warehouse in the UK will now get stored in Ireland. Or perhaps it won’t be offered for sale in Ireland at all. The Northern Ireland retail consortium, a trade group, has warned that extra paperwork could cause some supermarkets to pull out of the Northern Irish market altogether. 

Millions of square feet short

So the steady rise of online shopping, plus the step-change increase in online shopping because of Covid-19, plus the extra friction caused by Brexit all points towards greater demand for logistics space.

As a rule of thumb, according to CBRE, every additional €1 billion spent online in a country requires 800,000 square feet of logistics space. 

As we’ve seen, in the last six months online spending has surged from 25 per cent to 40 per cent of all consumer spending. In euro terms, that’s an additional €3 billion — or three million square feet of logistics space. 

To be sure, this is a strange moment. Irish people’s willingness to shop online might drop back when Covid goes away. But if Ireland’s online spend does settle at 40, 35 or 30 per cent of consumer spending, that will necessitate a lot more warehouse space.

Goodbody’s Colm Lauder said recently of the UK warehouse REIT Segro: “As online sales continue to grow, this will drive rents to new highs for supply limited logistics space, which occupiers (especially e-retailers) are well able to afford.” 

Though Ireland doesn’t have a dedicated warehouse REIT like Segro, investment is pouring in. 

KKR and Palm Logistics, global private equity firms, are building 452,000 square feet of warehouse space at the Greenogue industrial estate off the N7. They’re building it speculatively — ie, before they have tenants. 

Nearby, Mountpark has built 322,000 square feet of office space off the N7 at Baldonnell. That’s since been let to United Drug and Home Store & More. 

IPUT announced in May it was developing 280,000 square feet of logistics units at the Aerodrome business park. This follows over 200,000 square feet of logistics space acquired in 2019, and a further 280,000 square feet it has received planning for. 

Dublin Port company is building what it calls an “inland port” near Dublin airport, off the M50. This 44 hectare site will be used for container storage and logistics.

Three of these four developments are situated within a kilometre of each other, beside the N7. This is what logistics tenants are looking for: a location close to the M50, preferably near the N7. 

Logistics tenants have special requirements. Any old industrial unit won’t do them. They need buildings of a certain size and height, with a certain amount of automation built-in. And they need to be near the motorway network. The good thing is that industrial and logistics buildings are easy and cheap to build. They can be up and running in as few as nine months. But good sites are harder to find.

“The bottleneck is about finding the right sites on the N7 or maybe the N3. Land just inside or just outside the M50 is where they’ve had success,” says Marie Hunt. 

Much of Ireland’s existing stock of industrial units doesn’t fit the bill. They’re too small and too far from the motorways. It’s these industrial estates which have been targeted by Dublin City council for development into residential sites — like for example the Newtown Industrial Estate in Coolock. Two-thirds of Dublin’s industrial estates are to be redeveloped this way. Other old industrial units might be repurposed, eventually, into small last-mile nodes of the distribution network. Smaller last-mile warehouses are useful for food and quick-turnaround deliveries.

Unlike retail or office space, Marie Hunt is forecasting no drop in industrial rents, or yields, for the foreseeable future. Expect more deals.