Logistics, industrial sector steaming ahead: JLL

While Covid 19-accelerated behaviour changes may have forced the retail, hospitality, and office sectors to change tack to adapt, the logistics and industrial sector has been riding a tailwind straight out of the pandemic and is forging ahead on a new path.

Jolyon Thomson, JLL New Zealand head of logistics and industrial, says that with occupier and investor demand at record levels across the country, the biggest challenge the sector faces is meeting demand, which will only increase with population growth.

“We forecast that even the most conservative estimate of 1 per cent population growth by 2025 will require an additional 1.1 million sq m of logistics and industrial space.

“This would require the full current development pipeline of projects across Auckland, Wellington, and Christchurch to be completed,” he says.

“Stiff competition for assets, low cost of capital and robust demand/supply dynamics will put further pressure on already compressed yields. In Auckland, for instance, prime yields are already at an all-time low having dipped below 4 per cent.”

But the market remains extremely active. JLL’s logistics and industrial team has assisted with more than $1 billion of transactions in Australasia in the last six weeks, and has a series of auctions just around the corner, he says.

Thomson predicts this new trajectory of logistics and industrial real estate is still only in its early phase. He suggests there are five key drivers shaping future opportunities in the sector.

1. Future proofing through sustainability

With an increasing number of occupiers demanding Environmental, Social and Governance features (see footnote) in the spaces they occupy to meet corporate and social targets, the occupier push factor has become a critical driver in moving the sustainability agenda from a marginal consideration to a pivotal one for developers and investors.

From an investment perspective, sustainable buildings are also inherently more defensive. And while evidence of a green premium beyond nominal levels is scarce, an increasing number of investors are applying a brown discount on buildings that have lower energy efficiency and lack notable ESG features.

Further to this is the threat of obsolescence. Market factors and regulatory requirements will eventually make ESG features standard across prime logistics real estate, and retrofitting buildings is typically more costly than developing new buildings on a per sq m basis, Thomson says.

2. Finding the right mix of tech, location, and size

Shifting occupier requirements, rapidly changing technology and evolving supply chain networks will remain key factors impacting building design over the next three years.

Key to building design is finding the right mix of technology across the most productive building footprint, Thomson says.

With e-commerce players typically operating on low margins, automation and robotics can have the most direct impact in terms of increasing throughput and maximising productive capacity.

Advancements in automation and robotics that can further increase operational efficiencies will be increasingly adopted by a larger pool of occupiers.

Incorporating more automation and robotics solutions will result in buildings with smaller footprints as occupiers will be able to use the cubic capacity of their buildings more efficiently.

This will lead to increasing demand for taller buildings to permit Automated Storage and Retrieval Systems (ASRS). These technologies provide high-density storage and can save up to 85 per cent of occupied floor space.

A by-product of increasing use of technology is, of course, higher power requirements. This will increase not only due to automation, but also to accommodate growing demand for electric charging points for material handling equipment, delivery vehicles and cars. Power will become a critical location consideration.

3. Increasing supply chain agility

The pandemic has highlighted the weak points in global supply chain networks. While globalisation of supply chains has enabled cost effective and efficient movement of goods around the world, Covid-19 has underscored the need for more agility and flexibility across supply chains.

A consequence is the expansion of the supply chain network, and this may accelerate as some occupiers seek a different cost/resilience trade-off and look to localise production and sourcing.

Occupiers may also seek to diversify their supply dependencies to improve resilience. The reorganisation of supply chains will impact the occupiers’ overall footprint, location of their facilities, and how buildings are designed, predicts Thomson.

4. Incorporating people

While technological solutions will be increasingly adopted, people will remain critical to the operations of occupiers in logistics real estate.

There are two key aspects to this. The first is to ensure that operations are located in close proximity to a large labour force with the right skill sets and knowledge to work alongside technological solutions in buildings.

Second, but just as crucial, is to ensure the wellbeing of employees. The logistics sector has typically lagged behind the office sector when providing employees with attractive, productive, comfortable and safe workplaces. However, with tight labour markets and changing skill sets of warehouse employees, the push towards human-centric design to attract and retain employees will only increase.

Some key features that are increasingly being incorporated into building design and amenities across Asia Pacific include high-quality restaurants, retail and shopping amenities, childcare centres, exercise amenities such as gyms, walking/jogging paths and even rockclimbing walls, and improved in-building connectivity (e.g. multiple wireless access points).

5. Adopting on-demand strategies

There will be a growing segment of the market which will be facilities to be used ‘on demand’.

These facilities will provide occupiers with more flexibility to meet volatile customer demand and provide a different model than the standard lease commitment. This also reflects the increasing need for flexibility across global supply chain networks, Thomson concludes.

Footnote: ESG (Environmental, Social and Governance) is also called sustainability. In a business context, sustainability is about the company's business model, i.e. how its products and services contribute to sustainable development.

— Article supplied by JLL