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

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

Companies like Getir, Gorillas and Zapp, which promise to ship essential goods to people’s doors in a matter of minutes, have swept across the U.K. capital this year.

Such services rely on so-called “dark stores,” small warehouses used to prepare online grocery orders for delivery. Similar to dark kitchens in the world of food delivery, these facilities don’t serve customers in-store.

Real estate agents say they’ve seen average commercial rents climb in prime London locations thanks to an influx of demand from rapid grocery delivery firms.

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.

The Covid-19 pandemic had already “accelerated the industrial and logistics market by five years” thanks to a resulting boom in demand for online shopping, Tom Kennedy, an 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’ve hit our industrial market hugely in that inner-city zone, which in turn has increased the rents massively.

“It’s a big arms race for space, and there’s only certain areas in London that work for them. So that, in turn, has created bidding wars as well.”

Another real estate company, Savills, said it was seeing a similar trend. Demand for properties spanning more than 500,000 sq ft has waned this year, according to a presentation shared by the firm, while take-up of facilities under 200,000 sq ft has spiked.

Notably, Amazon has increased its take-up of sub-200,000 sq ft buildings by 64% in the past year, Savills said, showing that rapid grocery apps aren’t the only players impacting the market.

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

He said other sectors driving up demand include data centers, dark kitchens and parcel delivery.

Still, Green thinks rapid delivery players are having an impact. He says they’re “creating an extra layer of demand,” and that some firms are even willing to pay a higher price for “last-mile” facilities focused on speedy shipping.

“It’s a slightly opaque market,” Green said. “There will be less transparency in the deals. There will be one-off deals. They will be prepared to pay a larger per-sq-ft rate to get a certain facility in a…