First Mile Logistics
First Mile logistics is the transportation of goods across the first leg of the supply chain. That is, the movement of finished goods or products from a manufacturing hub to a warehouse or distribution centre. The First Mile takes goods from where they are manufactured onward to the next destination.
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The First Mile takes goods from where they are manufactured onward to the next destination, which may be a warehouse storage facility this may be prior to distribution to a fulfilment centre or it may be at a port, ready for the export market.
That said, supply chains and distribution models vary in length and complexity. The First Mile could mean different things for different supply chains, industries and businesses. However, in general terms they refer to business-to-business supply chain logistics that take place prior to the Last Mile, or up to and including the fulfilment / distribution centres.
Generalised supply chain stages
Source: Knight Frank Research
First Mile assets
Logistics assets are typically found at nodes in the supply chain. While Last Mile assets are found on the final node of the supply chain, closest to the end consumer, First Mile logistics assets are focused around key import and export locations including ports and airports, freight terminals as well as key road junctions. Demand for these assets and locations is determined by the volume of goods flowing through these nodes. Higher levels of production and trade, or an increased need to hold more stock, all drive up demand for these First Mile logistics assets.
Increasing the flow of goods through a specific node or port can be driven by increased manufacturing production and consumer demand for goods. However, even if demand rises, ports and intermodal freight interchanges with limited capacity will be unable to increase the flows of goods and capitalise on the opportunities. Investment in infrastructure and logistics may therefore be necessary to increase capacity.
First Mile logistics and infrastructure investment
Investment in roads or rail freight infrastructure can improve the flow of goods, reducing travel times, congestion, and stop-start traffic. An operator may be able to reach a greater catchment area within a specified drive time and this may enable them to consolidate more of their operations. Investment in infrastructure can also boost the profile of some, historically more secondary locations and can extend or expand prime location areas or corridors.
According to Preqin, the global infrastructure sector may see assets under management (AUM) overtake that of real estate, reaching US$1.87 trillion by 2026. It should be noted that there is significant crossover between logistics and infrastructure real assets and the growth of infrastructure-related investment offers clear opportunity for the logistics sector. Infrastructure investment may offer opportunities for firms and operators to move, improve or change their supply chains.
Strategic rail freight
The move away from road freight will mean greater reliance on rail freight and the development of intermodal logistics networks could offer opportunities at ports and rail freight interchanges.
The government has set a legally binding Fifth Carbon Budget which will see a 57% reduction in emissions by 2032, compared to 1990 levels, with a Net Zero Carbon target set for 2050. Shifting more freight from road to rail or water would help the UK meet future emissions targets. A tonne of freight transported by rail produces 76% fewer carbon emissions compared with road freight (Department for Transport, Rail Freight Strategy).
The government is committed to more rail freight and forecasts from MDS Transmodal on behalf of Network Rail in 2020, project demand for rail freight to double over the 15 years to 2033/34. However, ensuring the planning system is supportive of new inland rail freight terminals and that rail capacity is provided for freight coming from key ports and terminals will be key to driving the growth of rail freight.
Alongside ports, Strategic Rail Freight Interchanges (SRFIs) could offer opportunities for manufacturing growth and First Mile logistics as well as support the transition to a lower carbon economy. New rail connected inland terminals can help facilitate the movement of goods to and from ports and create new opportunities for the growth of logistics real estate at terminals or along rail corridors.
Energy infrastructure
Aside from transport infrastructure, power and energy infrastructure is also key for industrial and logistics occupiers. In West London, the electricity grid now faces severe constraints and developments could face long delays in securing a grid connection. Investment in power infrastructure will be needed if these locations are to continue attracting industrial and logistics occupiers.
The need for power and labour has become of heightened importance for logistics operators. Some of the more established prime logistics locations in the Midlands, or the South East and London are tight on the supply of both. However, locations that used to be centres of heavy industry and manufacturing, often have large sites available, with latent power supply as well as availability of labour. These factors could help these locations rise in prominence as hubs for both production and First Mile logistics. Their ability to capitalise on the opportunity relies on them being able to attract companies and investors. Government can make use of policy instruments to encourage private sector investment into facilities and infrastructure in First Mile hubs, through initiatives such as Freeports. Infrastructure and the logistics sector can therefore play an important role in the government's levelling up agenda.
As firms look to improve their efficiencies and invest more in capital expenditure on the automation of their factory or warehouse, they are likely to amortise the cost over a longer period and remain in the property for longer. This means sticky tenants for landlords and improved prospects and long term gains for investors.
New and emerging technologies are giving rise to new types of infrastructure. They are also changing how industrial and logistics facilities are used and driving new sources of demand for industrial land as well as logistics operator requirements and preferences. Investments in electric-vehicle (EV) charging networks, battery storage, hydrogen distribution, rail technology, 5G telecom networks, and data centre capacity are all shifting logistics operations and the uses and preferences for industrial assets.
The green energy transition and the need for greater energy security have huge implications for logistics, not just in terms of fleet vehicles, but as the locations of energy production shift, the supply chains and routes for distributing this energy change. The production of domestic green energy and the greening of fleet vehicles will require new infrastructure and industrial assets. BP has been active in investing in hydrogen distribution and electric vehicle charging, with £1 billion invested in EV charging infrastructure along with plans to build a blue hydrogen production facility in Teesside, which could produce 1GW of hydrogen and in July 2022, BP and BOC announced their joint venture in a hydrogen refuelling network for HGVs across the UK. This type of infrastructure means demand for industrial land for energy production and EV charging networks could influence fleet choices and route planning for distribution firms.
First Mile opportunities
Infrastructure nodes offer both potential points of weakness as well as opportunities for the strengthening or reconfiguration of supply chains and for investment and the growth of distribution as well as production industries. With infrastructure investment rising and warehouses forming an integral component of supply chain infrastructure and distribution models, there will be increasing opportunities for investment in First Mile logistics. These opportunities may be particularly attractive to infrastructure investors.
Investors have gravitated to Last Mile industrial markets for most of the latest cycle. Over the last decade, rapid growth in e-commerce and demand for home deliveries has driven competition amongst operators and strong returns for investors. However, investors are becoming increasingly aware of the opportunities in the First Mile of the supply chain. In March 2022, Cerberus Capital Management launched a joint venture with Almcor, focused on acquiring 'First Mile' assets that form part a critical part of the logistics supply chain, to create a Pan-European €1.5bn portfolio of assets. This trend should continue to strengthen. Particularly as First Mile markets typically offer higher yields than assets in Last Mile locations.
First Mile markets allow distribution firms to build and maintain a secure and responsive supply chain for their end users. This demand will continue, with the potential to create attractive opportunities for investors looking to deploy capital into assets underpinned by strong structural tailwinds.