Reshaping the Industrial real estate sector: 2019 Outlook
Gone are the days of simply leasing a shed. Game-changing forces such as e-commerce and omnichannel marketing are reshaping the industrial real estate landscape. When coupled with pressures on land supply in key metropolitan markets, increased use of technology, multi-modal transportation and the importance of optimising supply chain, distribution and warehouse design, industrial real estate has become increasingly complex and sophisticated. This massive shift comes with a whole new set of terminology and phrases, but what does it all mean, and are they just buzzwords or genuine initiatives that are here to stay? And, why are they making such a big impact on the Australian industrial real estate market?
Lpc Cresa's Industrial Director - Australia and New Zealand Michael Raymond takes a look at some of the emerging trends for the sector and what they mean for the year ahead.
Most of us are now familiar with the concept of e-commerce, which is very simply the activity of buying or selling products and services on online. It is the most significant trend that has had the biggest impact on how we buy and sell goods in the last decade – and it is only just beginning.
In Australia, we have embraced e-commerce enthusiastically. According to the Australian Bureau of Statistics, over the 12 months to August 2018, online retail sales increased by 37 percent, while the previous four years averaged at 29 percent. The astonishing fact is that, with an annual retail spend of $13 billion, this still only represents around 5 percent of the total spend.
Despite not being quite to the level of the United States, where online sales currently represent around 9.5 percent of total retail spend, Australia’s growth has been faster - and based upon the current annual growth rate, it will be at the same level (as a percentage of total retail sales) as the US by 2025. Adopting Deloitte Access Economics’ retail trade forecasts that will mean online retail sales will be around $38 billion by this date, which is a staggering three-fold increase.
The impact on industrial real estate is already very apparent. To fulfil this increase in demand, larger retailers are building their own massive distribution centres or utilising third-party logistics providers (3PL – see below), and both options are absorbing huge tracts of a diminishing supply of industrial land.
To give this some context, CBRE in the US estimated that US$1 billion spent on online retail sales equates to 1.25 million ft2 of distribution space. If we were to adopt a similar ratio and allow for local currency that equates to 87,000 m2 of distribution space for every AU$1 billion spent which means by 2025, we will need to accommodate an additional 2.175 million m2 of distribution space, or to use the enduring Australian yardstick, over 100 MCGs.
Omnichannel marketing is a more recent term which refers to a multichannel approach to sales that seeks to provide the consumer with a seamless shopping experience - whether they are shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store. The goal being, that it provides a seamless user experience for consumers at every touchpoint catering to their need for immediacy.
In a real estate context, this implies that there are multiple locations at which, or from which, the consumer can receive their goods immediately or at least on the same day. There is no real suggestion that the distribution centre is a thing of the past and will remain a critical component of the supply chain, but there is the real likelihood that other facilities will have complementary functions. The future may see retail precincts play an increased role in distribution, particularly for smaller, select stock.
Last mile delivery
Last mile delivery is the movement of goods from a transportation hub to the final delivery destination. The final delivery destination is typically a personal residence. The focus of last mile logistics is to deliver items to the end user as fast as possible.
Last mile logistics has become a focus area for retailers due to the growing demand for fully integrated omnichannel retailing. Evolving omnichannel needs are forcing retailers to evaluate current transportation network capabilities and make adjustments accordingly.
Ideally, the last mile delivery would be serviced by a distribution centre that has easy access and is within close proximity to the population base and markets. However, industrial activity is being pushed further from these focal points due to withdrawal of land due to rezoning to higher and better uses such as residential. This is particularly evident in the Sydney and Melbourne markets. Furthermore, the remaining industrial stock in the traditional inner-city industrial locations is approaching or is at obsolescence and unable to provide functional last mile delivery.
As a result, a number of logistics industry commentators have suggested that the last mile dilemma is not a single solution fix, but rather one that will need to be met through multiple solutions such as pick-up lockers, parcel pick-up points, in-store pick-up and distribution centres delivering to multiple locations not just retailers.
Technology and in particular, automation has had a huge impact on the nature and efficiency of modern warehouses – and will only continue to influence warehouse design and functionality. It allows for goods to be stored at a higher density due to narrower aisles and greater racking heights. Furthermore, these goods can be received, stored, retrieved and dispatched within shorter timeframes and in most cases without the need for human intervention, which implies reduced operational costs and increase safety.
Automated Guided Vehicles (AGV)
AGVs are not new and have been used in warehouses for close to 30 years, but as they become more affordable and functional their usage is anticipated to grow.
AGVs provide the flexibility required for warehouse owners to remain agile to changes in processes, production ranges and distribution channels. Traditional, bolt down automated conveyor systems are not able to provide the level of flexibility now being demanded. In addition, not only are AGVs becoming more affordable but their performance has improved and will continue to do so as the technology advances.
As technology increases particularly in sensors, on-board radar systems, intelligent software and self-learning capabilities the warehouses of the future could see hundreds if not thousands of small AGVs operating together locating, picking and sorting products.
As you would expect, anticipatory logistics is the process that foresees which logistics services will be needed in the future and in which region. For example, it enables online retailers to predict orders before they happen based upon historical consumer behaviour. They use this information, to anticipate demand and ship products to last mile facilities closer to the consumer to facilitate faster delivery.
3PL and 4PL
As you would expect Third Party Logistics (3PL) is simply that, your logistics being undertaken by a third party, either in part or its entirety and typically includes services such as goods storage and management, picking and packing, shipping and distribution, IT solutions, etc.
The model is being adopted by both large and small organisations, and arguably the biggest impact has been for “work from home” e-commerce and start-up companies, enabling them to compete without the capital investment into bricks and mortar retail and storage space. Consequently, 3PL organisations are experiencing growth and have been among some of the largest takers of industrial space in the past few years.
Fourth Party Logistics (4PL) is the logical extension of 3PL in which the complete logistics function is outsourced to an external provider. They not only provide the 3PL services but also provide strategic input, analytics, resource management, technology and infrastructure including the management of 3PLs and the oversight of the design, construction and supply chain solution provided by a third party.
Industry 4.0 is a term given to the current trend of automation and data exchange in industrial technologies. It includes cyber-physical systems, the Internet of Things, cloud computing and cognitive computing. Industry 4.0 is commonly referred to as the fourth industrial revolution.
The concept was originally introduced as the German government initiative at the Hannover Fair in 2011.
There are four basic principles in Industry 4.0.
- Interconnection: The ability of machines, devices, sensors, and people to connect and communicate with each other via the Internet of Things (IoT) .
- Information transparency: The transparency of Industry 4.0 technology provides operators with huge amounts of information required to make appropriate decisions.
- Technical assistance: First, the ability of assistance systems to support humans by collecting and interpreting data for making informed decisions and solving urgent problems on short notice. Second, the ability of cyber physical systems to physically support humans by conducting a range of tasks that are unpleasant, too exhausting, or unsafe for their human co-workers.
- Decentralised decisions: The ability of cyber physical systems to make decisions on their own and to perform their tasks as autonomously. Only in the case of exceptions, interferences, or conflicting goals, are tasks delegated to a higher level.
This is an exciting, albeit a little daunting, time for us in the Industrial real estate space. If you’d like more details about how to navigate some of these changes and emerging trends to maximise the opportunities for your business, contact Michael and our team today.