Can private equity’s expansive, expensive desire for warehouse real estate—see Blackstone’s supersized $18.7 billion deal to buy GLP’s U.S. logistics assets this summer—get any bigger?
Only by getting smaller, it seems.
The trend toward micro-fulfillment centers housed in owned retail properties, chiefly in densely populated urban environments, has given traditional retail an unexpected edge by using the very albatross that has hung heaviest on its ability to survive the onslaught of online retail: its physical real estate.
But is saving retail, thwarting Amazon, and upending private equity’s very public love affair with big warehouses (still Blackstone’s “highest conviction global investment theme”) too tall an order for this new generation of micro-fulfillment startups? A recent ramp-up in venture funding suggests that the trend is gaining traction.
Bricks, mortar, Fabric
On Wednesday, Fabric (the revamped, rebranded version of TelAviv/New York startup CommonSense Robotics), which operates multi-tenant micro-fulfillment centers for grocery and other same-day delivery retailers, announced the raising of $110 million in Series B capital to fund a new expansion push across North America.
Their idea is simple: let retailers (such as grocers, the de facto test case for the micro-fulfillment concept) leverage their own (and Fabric’s) real estate to compete against the Amazon(s) of the world.
As Fabric CEO Steve Hornyak told trade publication Progressive Grocer this fall, “They [grocery retailers] own real estate, all their stores, and they’re close to their customers because they already did all the math, and they know they can service enough people…who are a very short drive to their facility. If we carve out, say, 15,000 to 20,000 square feet inside that building and take a lot of the stuff that is repetitious to buy or purchase or otherwise, and automate it, you now have a multi-pronged value proposition.”
Fabric has made its early-stage mark by disrupting not just time-to-delivery but storage space. Per the company’s estimates, average warehouse sizes typically measure anywhere from the equivalent of four to 20 football fields, making them inherently ill-suited to the urban environments where many online shoppers live.
By contrast, Fabric’s standard warehouse site is one-tenth the size of a football field, thus easily housed on existing company premises. The sites are staffed by robots, which are capable of fulfilling an order in less than five minutes end-to-end, from the moment an order is placed online and ready for dispatch, and then delivered to the customer from one of a network of micro-fulfillment centers in under an hour.
Guess who’s buying
Fabric’s latest funders—noteworthy for their institutional heft—include Canada’s largest pension plan, the Canada Pension Plan Investment Board (which only recently entered the VC space), Singapore’s sovereign wealth fund Temasek, Palo Alto-based Playground Ventures, and Israeli venture capital firm Aleph.
Fabric next plans to launch a platform enabling retailers to build and operate their own automated fulfillment sites on their own real estate. The company will also build and operate its own micro-fulfillment centers in multiple cities next year, with the first under construction in New York City scheduled to open in the first quarter of 2020.
Funding the ecosystem
Other players in the space are attracting advanced funding rounds and scaling through partnership agreements with major global supermarket chains. Takeoff Technologies, based in the Greater Boston area, recently raised $25 million in a Series C funding round from Forrestal Capital in exchange for a 5% stake in the company, which is now valued at $500 million.
Takeoff has focused on last-mile warehousing for grocery chains with “buy online, pickup in store,” (BOPIS, or “click-and-collect”) channels, and already has direct partnerships with North America’s second-largest grocery chain Albertsons (which is owned by private equity and real estate investor Cerberus Capital Management), Dutch-based grocery multinational Ahold Delaize, and Wakefern, which owns the Price Rite, ShopRite and Fresh Grocer chains.
The latest capital round will fund Takeoff’s expansion in North America, Europe and Australia, and roll out its new autonomous “open shuttle” warehouse robots, part of a $150 million deal it struck earlier this year with robotics developer Knapp to deploy pick-and-sort bots at 50 existing grocery sites across North America.
Earlier this month, Winsight Grocery Business reported that Meijer, which operates supermarket chains across the U.S. Midwest, was partnering with Dematic, the automated supply chain logistics company that was bought by Germany’s KION Group for a reported $2.1 billion in 2016, on a reported micro-fulfillment pilot project based inside one of its own stores.
Other emerging firms include early-stage New York-based startup Ohi, which recently received a funding round from Flybridge Capital. Its spin is to repurpose existing, empty retail space for micro-fulfillment rather than developing on-site or building new warehousing space. The company contracts with bike couriers for low-emission same-day delivery. Speaking with Real Estate Weekly this week, founder/CEO Ben Jones told the trade pub that traditional warehousing networks are “no longer fit for purpose” in the next-day and same-day [delivery] world.
“Small-size” rent premium
A recent report from commercial real estate investment giant CBRE highlighted the increasing demand and faster rent growth for well-located, small light-industrial properties (defined as those measuring less than 120,000 sq. ft, or two football fields) compared to larger warehouses.
Against a 4% drop in availability rates for these smaller warehouse properties in the past five years, and exacerbated by very limited new development due to high land values and best use competition, CBRE found that rents for smaller warehouse properties have increased more than 30% during the period, compared to 16% rent growth for warehouses sized greater than 250,000 square feet.
”Strong demand for smaller warehouse properties will continue as retailers and logistics operators expand their networks to increase their proximity to consumers. As such, rent growth likely will continue outpacing that of large bulk warehouses,” they wrote.