Last-mile logistics — today and in the future

The following podcast is a production of institutional real estate incorporated. For the most comprehensive industry news and information, visit our website at iri.com and sign up for our free daily news alerts. This is my console. Thank you for joining us. Consider the mile 5,280 feet. That's the distance. I'm old enough to remember when track and field experts used to ask, is anyone ever going to run a four minute mile? It's it's always that last mile people often say the one that seems to take forever. Then again, in many contexts, a mile is is a short distance as in we're only a mile away just tight will be right there. And there's other contexts where the operative phrase is you miss that by a mile. If you talk to a logistics operator. You're likely to be discussing the so called last mile. We didn't use to talk about a last mile until the rise of e-commerce and online shopping came along and made that last mile critical to retailers who battle to offer same day service next day service. As in same day delivery next day delivery real time tracking flexible delivery windows free shipping and so on. So that pressure has forced retailers and logistics companies to rethink distribution networks warehouse placement and delivery technology. Hence the all important last mile warehouse hence Sean Delphin's purpose in life. Who is Sean Delphin? He is the president and CEO of Delphin Industrial which is steeped in warehouses and last mile fulfillment centers. He's our guest during this episode to discuss the state of the art of last mile logistics. Sean Delphin, welcome to the program. Thank you for having me Mike. I want to make a slight correction. And that is I think my purpose in life is to be a good boss and most importantly a good father and husband. Your shareholders your investors may have a different opinion. So we will snap to it and show them that you are on the job despite despite your fractured attention to other matters as we all have. We'll show them that you are on the job. In fact let me ask you do you happen to know the name of the man who broke the four minute mile. I don't. Okay well it was a little before your time his name is Jim Ryan and here's the interesting thing after he ran a four minute mile and I believe it was three minutes 58 seconds and and then they do the extension from there. Suddenly a host of runners broke the four minute mile. It was such a psychological situation a psychological barrier that once it was smashed all of a sudden humanity said oh you really can run a four minute mile and in a lot of other runners. Suddenly we're breaking the four minute mile now that psychological barrier far listeners that psychological barrier never existed in last mile logistics as Sean Delphin can tell you. Though new technologies have served to break some barriers with logistics I mean logistics have come a long ways in recent years again with the advent of e-commerce online shopping and so on. And you know Sean when we last talked you told me that we're in the early innings and you use that phrase and believe to point to e-commerce in the amount of of sales is e-commerce sales versus brick and mortar sales. What do you mean by those early innings what are the numbers today versus where you think you're going to be in terms of all this product that's going to be shipped to businesses and consumers through online ordering. Well it's a good question Mike I can tell you today depending on the survey that you're reading it's anywhere from 20 to 23 to 33% of retail sales now that's a big margin of error there. However different surveys have different numbers irrespective it's growing by roughly 13% year over year. And I for one can say that I personally don't buy more goods at stores but I do buy more online and I think the same is true for most of the populace and this is a trend that's you know a global trend. You have within the US over $3 trillion of e-commerce sales annually and that's something that's only expanding year over year. So it continues to grow and I remember before covid there were awful lot of older people who were would not order things online because they said I'm not going to put my credit card out there it'll get my credit card I get stolen. The delivery will get stolen this and that then covid comes along and kind of forces everybody there and I think a lot of people at that time shown and I don't know if you have these statistics I wouldn't expect you to have it your fingertips. But it seemed to me that that changed a lot there are a lot of people who thought wow you know I didn't get my credit card stolen my products are showing up at the door I'm home anyway so when it gets delivered I'm right there to pick it up the porch pirates wouldn't even have a chance. It did covid kind of advance that the whole e-commerce agenda. Basically accelerated at the time because everybody well there were still some stores open because they were what do they call those they call them. Essential services but at the same time a lot of people didn't want to go to the store they felt that was a bigger risk. Was there a big leap forward at that time because of covid. Absolutely I mean if covid was a game changer for anything it was a game changer for the way we consume goods. I remember in the early innings of covid roughly March. It's actually March April 2020 we as a firm went on a buying spree because our take was simply on a fundamental level that we are going to have to consume goods somehow. We prevented from going to the stores that means there's going to be a heavy demand for warehouse space. And at the time the market was very scared and so we felt that that was the best time to execute on these transactions and we happen to be right. I do actually have some of those numbers and I know that the sales before roughly in 2019 in e-commerce were around 570 odd billion annually. And in 2020 it jumped to over 800 billion today. We're looking at over 3 trillion and so that's a massive massive growth that's happened in that short period of time and so it was definitely a game changer from the standpoint of how we consume goods and what our expectations are when we order those goods. So we see that the giant warehouses of course are shown that are out there holding just tremendous tons and tons of products of all kinds. And then there's the last mile and we've only been talking about the last mile delivery system for years. But from the time from its advent when they decided when logistics people like yourself and retailers decided we really need to get to really compete with brick and mortar. We need same day delivery or at least the next day we need to get close in from that time to today. How has last mile changed? Last one. You're saying before COVID how has it changed? Well, no, not that I'm saying that when we when did last mile first come into existence? When did we really start using last mile and setting up these close in fulfillment houses or one last mile warehouses? Last mile has been around for quite some time and roughly how long? Roughly how long I would say at least since the 2010, you know, 2010, 2012. Okay, even before that. So let's let's say 2010, you know, we're not holding holding you to that or myself to that. From between 2010 and 2026 where we are today, what has changed with the last mile delivery system? Well, what's changed is the expectations of the consumer. You mentioned COVID bike and what COVID did was it changed our expectations in the matter of we got very used to ordering goods and we wanted to receive them now. And so what that meant is that there was a decline in retail sales or a decline in in store sales brick and mortar and an increase in at home or e commerce. That meant that if you wanted to profit by sending these goods out, you have to be as close to the customer as possible. because it became that we are going to leave more goods. I mean, this is from, e-tailers or e-commerce merchants. A common stat is that there's over 40% of goods that are often left in the cart if the delivery time is an excess of two days. - Wow. - And so what that's forced companies to do is to actually have a myriad of fulfillment centers in and around major metronomes. And that's just companies today recognize that something we knew quite some time ago, which is that the movement of goods is 45 to 75% of your supply chain. And that last mile is 50% of that total cost. And 50% of your movement of goods costs. And in that case, if you're not close to those consumers considering the margins of most goods, you simply can't profit if you expect to deliver those goods quickly. - So tell us about the complexities of last mile logistics. So you're gonna open another last mile warehouse that's a certain city, or a certain district within a certain city. What are the considerations or complexities you have to take into account? I'm sure location obviously is that that's one right there, but what are some of the other factors that you have to consider when you're trying to establish that? - Last mile is really constant optimization of problem solving involving traffic, labor, fuel, inventory positioning, delivery densities. And of course real estate quality. And that's why we built a last mile scoring system. It's our proprietary system to help identify locations with long-term logistics advantages. Those long-term advantages are often what are critical that allows a company to mitigate the cost of the movement of those goods. - So if you take a city like, well, I'll let you pick a city. Name a city and then tell me how many different last mile warehouses does it take to service the city? Say like San Francisco or Chicago or New York. I don't know if that's a fair question, Sean, whether you would be able to say that, you know, San Francisco has roughly dozens or hundreds of last mile warehouses. What does it take? - I mean, it's a good question. And not one without our data science team that I can answer, but every market is unique. And so what we'll do is take a market like San Francisco. We'll look at San Francisco and we'll identify what we determine as the optimal last mile quadrants within the market. And from there, we'll find the individual assets. Now that may be five quadrants. It may be 10 quadrants. And how many assets are within those quadrants is really dependent on the inventory in the market. So it's really dependent on the market itself, but every market is unique because every city's logistics patterns and infrastructure is also unique as well as their population densities. That's why it's a very specific business. It's not one where somebody can come in and say, I wanna buy a property in fill. And that's considered last mile because as the pro flies, it's close to population. But if you're not close to major arterial routes or vorts or whatever is critical for that supply chain, know what's happening is you have a facility that's not gonna reduce the costs that are most impactful for the tenant. And that's why it's not a question that can be answered on a nationwide blanket. This is often how many buildings there are. It's really dependent on how many actual last mile facilities are in these specific quadrants. And that could in many cases be very few because optimal last mile locations were often areas that weren't best suited for industrial. They were best suited for retail or for multi-family, et cetera. And so that's why the product that we acquire is not only very nuanced, but is in limited supply given in fill land, they were higher and better uses for that land itself than building fulfillment centers. - Now you mentioned traffic, you mentioned arterial, you need thoroughfares, you need to be able to move product and you need to be able to do it swiftly. But I would imagine that traffic, there's a lot of other factors within a given area regarding traffic that's gotta be one of the things that foils or frustrates and foils delivery drivers when there's accidents or rush hours and whatnot. What are some of the traffic factors that you take into account? You mentioned the big arterials or thoroughfares that you need to get the product there to and fro. What are some of the other traffic considerations? - Some of the traffic considerations are really the roadways themselves and how they're positioned within the way our scoring system works is what we're looking at is the population or businesses surrounding and there's certain variables like the demographics of that population, the percentage of online consumption, the size of the business, the nature of the businesses there, the workforce in the surrounding area. And so traffic comes in on the logistics side, but then coming up with our scoring, it's really a blend of the two. So I will say that what are some of the things that we try to avoid are acquiring assets which have generally limited access to call it free-flowing traffic. And you get that sometimes when you have poor infrastructure, you mentioned the San Francisco, there are cities like San Francisco and others that are very dense and yet have very old infrastructure in place. And so what you try to do is have facilities that are maybe outside of certain zones which would cause a truck or van to be in traffic for too long. The real profitability in e-commerce comes from a driver's ability to make a multiple, there's 50 or 100 drop-offs in a single drive time and that drive time ideally if it's within a couple hours or same day, they have to be able to make one drop-off and then come back. And as many deliveries as they're able to make in that single drive, typically the more profitable the retailer is. And so something that we look at is acquiring assets that the traffic patterns themselves won't impact delivery of the goods. I know that was a long answer, but it's a very sophisticated analysis that's really dependent on each and every market and those sub-markets within, though, and simply the infrastructure itself. So let's talk about the future a little bit. We hear so much about autonomous vehicles. We are getting-- San Francisco's got driverless taxis now and so on, yet. Are they still on the road? I heard a lot of them got pulled off. Well, that's-- I didn't hear that. So that might be up in the air a little bit. I don't know. That was today-- I didn't even hear that. OK. Obviously, it's a work in progress. Is that something that you guys keep up, kind of a finger on the pulse of that? And obviously, if the vehicle can get itself there because the roads are mapped out and such, you still need a human being on board just to transfer the packages, or is there some other consideration here that people are alerted to come out and pick up their-- well, you still need a human being for that, I would imagine. What would a higher level of autonomous vehicle, which obviously we'll get there in time? How do you see them actually fitting into this? I think we're still very early on in the autonomous vehicle. The autonomous vehicle's delivering goods. When I say early on, that made me two years. But my personal opinion-- and it's simply my personal opinion-- is that drones is going to be an unlikely delivery method because many cities are not going to want skies filled with drones. Well, that's drones. But you could see autonomous vehicles. I mean, a land base. A drone is an autonomous vehicle as well. But a land-based vehicle is absolutely. And so I think that is the future. Although we haven't seen within our spaces any ten inch retrofitting for those uses. That isn't to say that we don't have electric vehicle chargers, et cetera, which we do. And so those will inevitably be used for vehicles of that nature. But it is one of those things as AI advances and the technology improves that I believe will take over the industry. Although what we're seeing on the the ground is still pretty early on, given that you're not seeing it as widespread as you would think, given there's already taxis on the road and other autonomous vehicles. - So is it your expectation that even if you get autonomous vehicles on the road loaded with packages, you're still gonna have a person on board that vehicle to handle packages? - One of the things that's beautiful about real estate is that we have to be an expert in finding the right buildings and ensuring that those buildings are of the most modern design that can be utilized by the widest array of tenants and that will reduce their cost to deliver those goods by simply proximity. We don't have to get into the technological advancements that tenants are making in order to increase profitability. I don't, that's the long way of saying I don't know per se if there's gonna be a person on board. I think eventually, probably in the near term, there won't be. As the technology gets better and one can look at simply the accident rates of self-driving Teslas versus the general populace or regular vehicles when we're driving them, it's much less. And so that will come and I don't believe that there's going to be a person on board. I don't think there's gonna be a need for it. I said, most of the cities in this country, or I would venture to say maybe all of them haven't been designed to optimize e-commerce or autonomous vehicles. So there's going to have to be significant changes in infrastructure in order to optimize for these deliveries. So where are back to current day? Where are the biggest inefficiencies in today's delivery networks? What is out there right now that's the biggest headache you've got or the biggest problem or impediment that needs to be solved to make the networks out there more efficient? - From what we're seeing on the ground, I would say that the largest inefficiencies typically come from poor inventory positioning and inefficient routing. And what that really means is that companies aren't optimizing their supply chain in order to maximize profitability by ensuring that they're reducing the cost of the last mile. That's why we use over a decade of operational and market data combined with AI-driven convictions for to identify submarkets where logistics, efficiencies, material, and perform the general market. And why that's important is because as the industry is evolving, the assets that we own become more valuable because not every tenant is an Amazon that truly understands the supply chain like the back of their hand and recognizes that it's saving those few cents on every delivery that's really contributing to the boost in their bottom line. But that's happening. - What are the metrics that matter most when it comes to last mile performance? When you're doing your analysis each week or a month or day, I'm sure a lot of this is automated for you and your rival organizations. What are the metrics you look at that tell you how you're performing with your last mile warehouses? - It's pretty simple. Do our warehouses lease? And if so, are they leasing quickly and at a premium to the competitive set? And I can tell you that our spaces on average lease eight to 12% higher in rents than the competitive assets around us. And so we're clearly doing something right. And that's what we really look for. We look for, forget about all the data analytics that go into it and all the sophisticated back end operation. Are the boots on the ground finding the right assets and are those assets actually successfully being quickly leased and at rates above what we projected? - Now, a last mile warehouse then, which is, what's the scale versus the big warehouse? You've got the big warehouses outside of cities. When you're talking about a last mile warehouse, that's one, what fraction of a major warehouse is that? I mean, how, what's the square footage of last mile warehouse? These are much smaller scale, correct? - They tend to be, I can tell you, our average tenant size is 25,000 feet. And our average property size is 150,000 feet. Now, last mile has everything to do with location though. So the way traditional today logistics operations work, or call it your supple, the optimal supply chain structuring would be to have one or two large distribution centers that often are upwards of a million plus feet. We're talking about four large tenants on the outskirts of major metro markets. And within that major metro market, you have anywhere from five to 10 smaller locations that are delivering the goods ordered most commonly by that given neighborhood, whether it be consumers or businesses that are acquiring those goods. And so those facilities by nature need, tend to be smaller because they don't need to have the inventory. The inventory typically is moving very quickly in and out. Often in the same day, you're clearing all the inventory that's in the warehouse. So Amazon, we'll talk about last mile. Amazon is the first one that comes to mind given their market share and how sophisticated they are. We have them in some facilities where they're in 40 to 50,000 feet and they're delivering up to 60,000 packages a day from that facility. So the facilities themselves tend to be smaller because we focus on that last mile from the fulfillment side. However, if there was a larger facility as well, that can also be a last mile center. It's really dependent on how much goods a tenant has to deliver in a given area. That's really what it's contingent on. - Now, a retailer would come to your organization or an organization like yours and say, "We need a warehouse." And this is our requirements, this is where we need it. And then you go to work on that. You don't build these things on spec, correct? Because not the last mile ones. Do you realize? - Absolutely. - Oh wow, okay, so tell me how it works. How do you go about it? - It's really dependent on it. My financial or not, I would call a merchant builder, although we build tens of millions of feet, we tend to often build when we can't find real estate that we can buy modern real estate at replacement cost. If it's older and you're paying more than replacement cost, what we would like is to frankly build a perfection in today's modern standards and do an at replacement cost. And then you have a best in class facility. However, we absolutely will build on spec and most often do. And the reason being is because if you look at your supply chain cost, your real estate is your smallest cost component at three to six percent. Your, as I said, movement of goods is 45 to 75. And the other largest component is your labor at 15 to 25. And what that means is that tenants when they're doing the study of how they should run their inventory and their supply chains, the last component that they decide on is where am I going to rent the real estate? And typically they have a three month window, three to six is a pushing it. That most tenants want to occupy, because again, it's not the heaviest cost associated with the supply chain. It's the smallest cost component. And if you don't have the facility ready for them, then you're gonna miss that deal. And so what we've found is that building on spec allows you to really cater to the market demands and be able to provide, just like they provide to their consumers quickly, the goods were able to provide them the location very quickly as they determined they needed. - Now, helping a problem without getting yourself in trouble here are municipalities in terms of, you know, you're trying to put a warehouse in place, last mile warehouse, and they have their planning and zoning and they've got their review boards and they've got their rules and regulations and all that. Do most cities understand, are inviting the kind of the last mile warehouses do they create a lot of bottlenecks? Are there a lot of headaches around this? Do they feel that what they get in return in terms of tax revenue and such? is for example, self storage, a lot of cities say, you know what, you take a big footprint, you don't pay much in taxes. You don't employ very many people is really what it's about. And there's not much employment there. You don't do you have that same problem with the last mile of air house or is that a whole different ballgame? How big a headache are city planners and city councils around this whole network? I would say that. You have to take the fifth. No, I won't take the fifth because it's the reality of our business. That's one of the reasons that the properties that we buy are finite in nature because nimbism is a real thing. I wouldn't even say it's the city planners. I would say it's the population. Populations today, we all want our goods quickly but we don't want to live next to a warehouse. You know, warehouse is not the same thing in today's world as it was yesterday. In yesterday's world, people were, you know, they perceive the warehouse as manufacturing and bringing jobs today. What people are most concerned about is their children playing on the streets and delivery vans potentially hurting them or plugging up their streets or the fumes from different trucks. You know, I mean, the things I've heard are endless. I mean, we had a project in a given location that I will call a very friendly business location. We were not building on weapons. We were building in an infill location that was optimal for last mile industrial and that had industrial properties in a very close proximity to it. And we had 1200 people show up to a city council meeting to approve the project and they were protesting it. Wow. And that is just-- They don't want the extra traffic. They feel like it's noise and traffic and it's like, I don't want it in my neighborhood. I've heard every excuse under the sun as to why people don't want it. And so what that does, Mike, is that it causes not only city planners but mayors and different cities to really want to put the brakes as much as they can on that not only industrial development but also utilizing properties in the nature that last mile fulfillment centers are. They often don't want them to run 24 hours a day. And so you'll have caps put on how long the facility can operate for any given day. What hours it can operate in. I mean, it's just endless the restrictions that are now coming out of thin air on these properties. And the reason being is because they're getting pushback from the residents. And so we're not seeing this in an isolated location. This is something that we see nationwide. Brand it, it's far worse in certain locations where logic doesn't come into play. But it's something that is consistent throughout the country. Interesting. Final question, Sean. How are fulfillment centers-- these last mile fulfillment centers going to change? In the next five or 10 years. Do you see significant change? Or is it-- Mike, this is kind of the basic blocking and tackling is not going to change all that much in over the next five to 10 years? What do you say? Mike, we're not simply reacting to where demand has been. We're trying to predict where logistics relevance is going. And what that means is finding optimal locations and the markets themselves that we believe will have the most demand drivers going forward. That said, we don't have to predict precisely how that e-commerce world will change, whether it be drones or autonomous vehicles, et cetera, delivering the goods. What isn't going to change is that you need proximity to the end user in order to be profitable. That as e-commerce grows, expectations from consumers is going to continue to grow as well. And before we were willing to live with a week delivery, and today, if it's more than two days, we leave it in the cart. And so what we can anticipate is that that trend will continue. And for us, it's finding the best real estate in the right locations that can support growing e-commerce trends and delivering to that populace. Our guest has been Sean Delphin. He is president and CEO of Delphin Industrial, talking last mile. Sean, thanks very much for coming on the program. Thank you very much for having me, Mike.