If online retail needs 3 times as much space, how much will be enough?

Industrial and logistics space provide critical enabling infrastructure for the modern economy. It oils the wheels of consumption, trade and economic activity by building and delivering the goods required by businesses and households. Tech is having a dramatic impact on both production and distribution with major real estate implications.

Industrial: The Age of the Robots

Industrial occupiers need real estate in which to physically build product or refine raw materials. Structural changes since the 1970s has devastated such activity in Australia as companies ‘off-shored’ production to countries with lower land and labour costs. Manufacturing as a share of both Australian GDP and employment fell from approximately 28% in the 1950/60s to 5% in 2020¹.

Technology changes this calculation. Robotics, automation, and multiple connected devices (the ‘Internet of Things’ or IoT) are revolutionising production, so much so that it is heralded as a new industrial revolution ‘Industry 4.0’.

Industry 4.0: the Fourth Industrial Revolution

Industry 4.0 erodes the appeal of off-shored production as fewer low skilled and more high-skilled technical labour is needed to produce more complex goods. That labour is more readily found in developed economies. TSMC, for example, is a Taiwanese semiconductor manufacturer. Its most advanced facility provides a hyperclean environment that would be disrupted by human workers and is therefore, rarely visited and remotely managed.

Technology also enables better space efficiencies which lower land costs. In the US some 1 million manufacturing jobs have been re-shored since 2010². If Australia follows a similar growth trajectory, far higher domestic industrial activity is likely.

IT capabilities now allow new products to be designed and tested virtually without the time and costs needed to build physical prototypes. This significantly reduces risks and costs of creating new products, democratising supply chain access. ‘FabLabs’ (fabrication labs) such as Snepo FabLab in Sydney offer individuals and start-ups access to the latest advanced production techniques and help to breathe new life into Australian manufacturing.

Logistics: The Rise…and Rise of Online Retail

Australian online retail sales have exploded over the last demand, rising from around 3% in 2010 to close to 12% in 20203. Despite strong recent growth, penetration rates lag far behind other large economies suggesting much growth potential.

Figure 1: Online penetration rates – Australia has significant growth potential

Online retail correlates directly with logistics real estate demand. Online retailers need three times more space than physical retailers as they must store more stock, greater product variety and guarantee efficient delivery and return⁴.

Analysis from the UK, which is the west’s most mature online marketplace, shows that every additional $1 billion of online spend requires 40,000sqm of ancillary logistics space⁵. With Australians online spend expanding by over $20 billion in 2020 alone⁶ and much more growth projected, the logistics bull-run is only just starting.

Locational Demand: New Types in New Locations

Technology not only fuels more aggregate demand, it is also changing where and on what it is directed. In respect of physical real estate – the ‘what’ – the integration of tech in production and supply chains drive real estate efficiencies. Automation and robotics reduce human labour and the associated need for car parking, toilets, amenity space etc. It also allows higher vertical stacking. Handle, for example, a logistics robot from Boston Dynamics, can stack 15kg boxes up to 1.7m tall⁷. This allows businesses to take smaller, denser assets. In time we could even see cubic square metres could replace square metres as the primary measure of size.

Several trends align to push demand towards urban locations.

• Firstly, the need for production and fulfilment speed increases the value of physical proximity to customers.
• Secondly, greater automation increases the importance of digital infrastructure – access to power and high-speed internet – alongside transport infrastructure.
• Thirdly, greater need for high skilled creative, engineering and design-based labour instead of low skill production workers. Attracting and retaining the right talent is essential to business success and encourage occupiers to move closer to where that labour is.

This points in or edge-of-centre urban locations close to high skilled labour and customers replacing the sprawling out-of-centre industrial and logistics parks of the past. Individual assets will become more sophisticated, far more than just a shed.

Higher CapEx requirement due to ingrained tech will make occupiers ‘sticky’ as the cost of occupying new premises grows. Occupier sensitivity to power and internet risks means assets will need greater digital resilience too, perhaps through on-site renewable generation capacity, batteries or and multiple internet connections. New space typologies will emerge, reflecting the new priorities of occupiers and their customers.

New industrial and logistics real estate typologies

Industrial and Logistics

Whichever way you look at it, tech is a disruptive force in industrial and logistics but one which will aid Australian real estate. Demand will continue to evolve rapidly in ways that cannot yet be foreseen. It is a solid bet that a modern, readily adaptable asset in growing urban locations is well replaced to ride the gathering tech-driven industrial and logistics wave.

Reference

1. AMTIL. (14/05/2020). The decline of Australian manufacturing… and the impact of COVID-19.
2. Restoring Initiative. (2021). 1 H2020 Data Report.
3. ABS. (2021)
4. Capital Economics (January 2021). The Future of Property.
5. Prologis. (September 2016). Global E-Commerce Impact on Logistics Real Estate.
6. ABS. (2021)
7. Principle Logistics Technologies. (2020). Is Robotised-Automated Warehouse Pallet Stacking the Future?