What Is Last-Mile Industrial and Why Does Location Matter

"Last mile" has become a familiar term in industrial real estate, particularly with the growth of e-commerce and faster delivery expectations. But it is also a term that can make a relatively simple concept sound more complicated than it is.

Last-mile industrial is about proximity. These properties help businesses complete the final leg between a larger distribution network and the customer. But that customer does not necessarily have to be someone waiting for a package at home. It could be a contractor picking up supplies, a restaurant receiving a delivery or a business waiting for parts or equipment. Once you look at last mile that way, it becomes easier to see why these properties matter and why some of the best locations can be difficult to replace.

It Starts with Being Close to the Customer

Think about how a product moves through the supply chain. It may arrive at a port, move through a large regional distribution center and travel hundreds or even thousands of miles before reaching a local market. Eventually, though, it has to get to the person or business that needs it. That final trip is the last mile.

For businesses making those trips every day, a few additional miles can add time, fuel costs and logistical complexity. A warehouse 40 miles outside a population center may offer plenty of space and easy interstate access, but it may not be the best location for a company making dozens of local stops each day. The closer a business can position its operations to the customers it serves, the more efficiently it can make that final connection.

E-commerce brought greater attention to this need for proximity. As consumers became accustomed to receiving orders in a day or two, retailers and logistics companies began positioning inventory closer to population centers. But the same principle applies to a much broader group of businesses, particularly those that occupy small-bay industrial properties. An HVAC company needs to get technicians, equipment and parts to customers throughout the day. A building materials supplier needs to serve contractors working on projects across the market. Food distributors, auto-related businesses, local manufacturers and other service companies all rely on locations that allow them to reach customers efficiently.

These companies may not think of themselves as last-mile businesses, but proximity is just as important to their operations. Their demand for industrial space is driven by the everyday needs of the local economy, not simply by e-commerce or any single industry.

The Best Locations Aren't Easy to Recreate

One of the more interesting things about last-mile industrial is that the buildings themselves may be fairly ordinary. In fact, many are older industrial properties located in established parts of a market. The location is often what makes them difficult to replace.

As cities grow, industrial land close to population centers competes with apartments, retail, offices and other uses. Some industrial properties are redeveloped, while much of the new warehouse construction moves farther from the urban core where larger parcels of land are available.

Meanwhile, the businesses serving those communities still need somewhere to operate. Population and business growth ca increase the need for local industrial space at the same time that supply of well-located properties becomes harder to expand. It is one reason established industrial real estate investors do not automatically view the age of an industrial property as a disadvantage. A newer building may offer higher clear heights or more modern features, but a tenant making local deliveries or service calls may place greater value on being 15 minutes from its customers instead of 45.

Small-Bay Industrial Plays an Important Role

This is also where last mile and small-bay industrial often come together. Not every company needs a massive distribution center. Many businesses need 5,000, 10,000 or 20,000 square feet, along with loading, parking, storage and easy access to the surrounding market. Multi-tenant small-bay properties can serve a wide range of these businesses within the same property.

A contractor, distributor, service company and light manufacturer may have very different customers, but each needs functional industrial space that allows it to receive goods, store inventory or equipment and efficiently serve the surrounding market. That broad range of uses is part of what makes small-bay industrial relevant to the last-mile story. Demand does not depend solely on e-commerce or one large logistics tenant. It can come from the many businesses that support the day-to-day activity of a local economy.

At Lucern Capital Partners, we consider these dynamics when evaluating small-bay and light industrial properties along the East Coast. Last-mile industrial is ultimately about getting goods and services where they need to go efficiently. For the industrial asset class, that puts a premium on functional properties in locations where businesses want and need to operate.