The e-commerce boom and its industrial uprising in Australia
The global rise of e-commerce has placed a myriad of new demands on the retail environment, disrupting the traditional retail model and forcing businesses to modify their operations to cater to the new marketplace of direct-to-consumer sales. As the expectations of the time-conscious and price-focused consumer have evolved, so too has the retailer’s reliance on logistics facilities that cater to their growing requirements for responsive delivery and inventory management. This has seen what was once simply a supply chain-based sector evolve into one of the most rapidly-changing and more complex segments of Australia’s property markets, with logistics facilities rising in popularity as a an asset class amongst commercial investors. So where are we seeing these changes? And what new demands in this placing on the ‘traditional’ industrial space?
Australia’s online revolution
As you are probably well aware, e-commerce has already been readily adopted in a number of leading markets across the globe, with the US in particularly being quick in its assumption of the online retail model. The country’s concentrated populations and inner-city catchments have in many ways lent themselves to the rising prominence of online shopping and delivery services, with some retailers offering as little as three-hour delivery timeframes. Whilst the shift in other areas has been somewhat slower, the transition towards online retailing is already well underway in Australia. The arrival of e-commerce giant, Amazon, represented a major milestone in our move away from the traditional retail model, and although still only a fraction of the country’s bricks-and-mortar retailing, online spending is growing at an increasingly faster rate compared to other retail models. Statistics from the Australian Bureau of Statistics revealed an unprecedented year-on-year growth rate of 33% in the six months prior to September 2018 – the highest the country has ever achieved, and a statistic that pushed online retail sales across Australia to 5.3% of overall retail trade.
Where is the growth in this sector?
The growth in the online retail sector, and the resulting need for supporting logistics space, can be attributed to a number of advancements in segments spanning from e-commerce through to food & grocery and pharmaceuticals. Let’s take grocery delivery as our prime example. No longer do consumers need to get in the car, drive to the grocery shop, browse the aisles, fill their trolley, and lug their groceries back into the house – all this can be done from a computer at home. In fact, the fastest growth of all is being seen in meal kit companies, with the market growing a whopping 40.7 percent in 2017 in the US according to Earnest Research. Australia is following a similar trend, with the emergence of brands like HelloFresh, Youfoodz and Gourmet Dinner Service driving growth in this segment of the market. Such companies have a clear target audience in the busy and health conscious consumer, with urban millennials and Gen Xers providing an ideal consumer base for these products and services.
Whilst still significantly lower than the proportion of e-commerce sales in the US (Ecommerce sales accounted for 9.6% of total retail sales as at Q2 2018 according to the US Census Bureau of the Department of Commerce) , JLL have projected that Australia will reach the current US share by as soon as 2020/21 This growth is set to have a major spill over effect into the industrial sector as retailers seek logistics facilities to support their need to store, manage and deliver large quantities of inventory within shorter timeframes. In fact, e-commerce is forecast to generate a requirement for 350,000 square metres of additional industrial space each year across Australia until 2022 alone according to Property HQ.
How is this changing demand in the industrial space??
As commercial investors, it’s vitally important that we not only recognise the changes that are occurring within the retail space, but that we also fully understand the implications these will have on future demand so that we can react and adapt our investment criteria accordingly. There are a number of trends we have identified at MPF that we believe will be crucial to harnessing the future growth potential of the logistics market.
Location, Location, Location
With faster delivery times and a more efficient consumer experience being the primary objective for the majority of online retailers, future demand will inevitably turn towards industrial spaces that are strategically located and structured to serve these time-sensitive needs. These spaces need to have supporting infrastructure in the form of arterial roads and major distribution routes such as freeways and highways, links to other hubs or networks, and perhaps even in the near future, air clearance for drones as well. In an increasingly cost-competitive market, ensuring logistical cost efficiency is and will continue to be a key factor in business decisions. Urban logistics facilities will continue to play a significant role as consumer demand and expectations rise in major cities.
Flexibility is key
The rise of urban logistics facilities may see regional hub sizes maintain and focus more on logistics management rather than traditional warehousing. This will also increase the demand for flexible spaces that allow for adaptation to changing demands and the exponential advancement of logistics technology and robotics. Equally, there may be a shift in the flexibility of terms offered to these retailers as businesses strive to adapt to accelerating changes in the market. Already, the rise of short-term leasing in retail could see the same trend impact the industrial spaces directly linked to that industry.
New age specs
Retailers seeking to store and manage large quantities of inventory will also require logistics facilities with specifications and features that support this. With advancements in technology enabling more efficient space utilisation, warehouses can now stack higher and denser. Needless to say, the technology factor is key for most industrial spaces. Technology solutions can be as basic as high-speed internet to complex technologies such as robotic stock picking, drones and RFID; with each solution having specific requirements. Smart spaces that cater to IoT requirements are also gaining in appeal, and demand for data centres is growing rapidly. Some of this demand will flow onto Australian shores and it is likely that data/server requirement demands will continue to grow as businesses become more data-focused. Some of these needs could translate into cabling needs, server room requirements, charging station requirements for robots, and even structural obstructions for RF solutions can become a decision factor
There has been plenty of talk about the warehouse of the future and what that looks like, and while some argue most of the changes will be in the retail warehousing sector, it is also evident that the industrial sector as a whole is experiencing a shift that is likely to accelerate as industries and businesses continue to integrate and turn from their traditional business models. Hence as investors, it’s important that we invest in assets that take into account the trajectory of such changes and their timelines to ensure the investments we make can mitigate any potential risks and also experience greater growth.
Mair Property Funds is a Western Australian company specialising in the acquisition and management of commercial property through unlisted property trusts. Our acquisitions specialists are focused on identifying superior investment opportunities through the close monitoring of industry trends and our stringent investment criteria.