Ecommerce is slowing, which is impacting our logistics demand

Australian ecommerce penetration has fallen from the dizzy heights achieved during the pandemic. Online accounted for 11.0% of total retail sales in June 2023 compared to 15.3% in September 2021 (Figure 1). Whilst online sales are still significantly higher than 2019 levels, the growth rate will be measured. Here we explore what the ecommerce slowdown means for its biggest real estate beneficiary – logistics.

Figure 1 – Ecommerce as a proportion of total retail spend

Lower: Take-up will reduce

Ecommerce occupiers rely on logistics space to fulfil orders. Consumers favour online retailers that offer fast and convenient delivery which depends on an efficient logistics network. Given its essential nature, the pandemic-era penetration spike caused a scramble for space (Figure 2). Occupiers took anything they could. Because it takes time for the development pipeline to respond with new supply – vacancy plummeted, rents and values rose rapidly.‍

Figure 2 – Quarterly logistics take-up (sqm)

The ecommerce slowdown compounded by the economic environment in which high inflation and interest rates weigh on retail expenditure, changes this trend. Occupiers are no longer under immediate pressure to find more space. H1 take-up was down on the same period last year and 15% lower than the 5-year average. Though, in constrained markets in Sydney and Melbourne, a slowdown of take-up may in fact be due to a lack of supply opportunities. Whilst leasing will still be active in the future, we expect take-up to be lower going forward now the scramble for space has passed.

Selective: Occupiers will be razor focused on a specific space

Occupiers will use the slowdown to recalibrate existing portfolios to maximise efficiency and minimise cost. They will use three considerations to do so: automation; sustainability; and customer proximity, each of which has specific property requirements (Figure 3)

Figure 3 – The three considerations logistics occupiers will use to recalibrate portfolios

More occupiers are using automation to pick and pack orders and undertake light manufacturing work as technology costs fall. Automation increases speed, reduces reliance on hard-to-find and expensive human labour and, if deployed in tall warehouses, enables the occupation of less overall space which saves money.

Sustainability is critical as occupiers seek to reduce their environmental impact in response to consumer, shareholder and government demand. This favours modern, energy efficient warehouses with on-site renewables which has the added benefit of lowering occupier exposure to volatile energy prices.

Efficiency fulfilment is key in a competitive ecommerce landscape. Well-designed warehouses within or near to major population centres which allow rapid processing and fulfilment are preferred. Being close to customers also reduces transport costs – typically the largest cost for logistics occupiers.

Shortfall: Supply and demand will be mismatched

Occupiers will lease space which best meets their automation, sustainability and efficiency needs. They will shun secondary space which does not. When any space would do during the pandemic-era scramble, current conditions allow them to focus on quality. This is typically brand new or recently refurbished sheds or truly urban logistics within cities.

The supply of modern well-located logistics space is already at record lows which has led to exceptionally strong rental growth. Despite this performance, we think the supply pipeline will temper in light of economic uncertainty, higher construction costs, pricier debt and a lack of zoned and serviced land. Quality space demand will continue to outstrip supply.

Occupiers will have a greater ability to avoid secondary, poorly located or designed space. As such we expect a two-tier market to emerge. Unlettable secondary space will need to be modernised or, if that is not viable repurposed for alternative uses. This will mirror the divergence in the office market between pre- and post-pandemic aligned space.

The supply/demand imbalance and its impact on pricing will aid the financial viability of more intensive use of existing, well-located logistics sites. Australia’s first multi-level scheme emerged in South Sydney after many years of debate on the feasibility of this format. Many more are already underway, fanning north, south and west of Sydney. We anticipate more innovative approaches to emerge to bridge the supply gap.

Conclusion: Logistics will remain a dynamic sector

Logistics take-up will be softer in line with slower ecommerce growth and weaker consumer spending. Occupiers will still be activity taking the modern, well-located space which enables automation, sustainability and efficiency. Such space will remain undersupplied and competitively sought.

Choosier occupiers spell trouble for older, poorly located warehouses which do not meet modern standards. As occupiers consolidate on the best space, there will be a widening divergence between prime and secondary. This will be yet another example of the structural change in our economies and societies, fundamentally altering traditional real estate.