How logistics is transforming industrial real estate

Demand for industrial real estate assets is growing at a rapid rate, thanks to long-term structural changes in the market. As a consequence, there’s a huge undersupply of the modern, high-spec assets that tenants are demanding.

Dynamics in industrial real estate mean top-performing assets are located in markets with high levels of consumer spending, population density and low unemployment, centrally situated near infrastructure hubs.

The role of ecommerce

Some of the trends driving the changes are rising ecommerce sales and increasingly affluent millennial spenders and there are opportunities for investors to develop and own a new breed of industrial assets that are fit-for-purpose for the likes of Amazon, Alibaba and others.

Only six per cent of retail sales in Australia are online, versus 14 per cent in the US and 18 per cent in the UK. The growth of ecommerce in Australia is projected to rise to a 15 per cent market share of all retail sales over the next decade, assuming the local market follows the trajectory of other major markets, including the UK, Canada and Mexico.

Ecommerce businesses have specific requirements when it comes to logistics, and favour warehouses and facilities that are close to consumers and with good transport connections. This demand will only increase as more consumers start choosing next-day and same-day delivery, requiring logistics centres to be located close to shoppers.

This is reflected in underlying fundamentals. An analysis of ecommerce and logistics businesses’ supply chains shows that, on average, rents account for five per cent the cost of doing business, while transport costs can be as much as 50 per cent of total costs, highlighting why close proximity to customers is key.

Return to sender

The rise of reverse logistics businesses is also an opportunity for investors. These are companies that collect, check and return online purchases to e-tailers. We estimate the returns market is worth $6 billion and has the potential to grow to a $15 billion sector by 2025.

One of the factors driving the growth of the reverse logistics sector is consumer disappointment, with our research showing 63 per cent of consumers say the most negative aspect of online shopping is returning goods. Ecommerce businesses are addressing this by forming relationships with reputable reverse logistics operators who are part of the puzzle of turning this sentiment around.

Reverse logistics operators typically have a global remit and there’s plenty of opportunity for them to continue to mature, as the ecommerce market also continues to grow. This means opportunities for investors to develop facilities from which reserve logistics businesses can base their operations.

Rental uplift trends

Increasing demand for industrial assets located near urban centres is also reflected in rents, with assets closer to town able to attract higher returns. Rents in logistics real estate are a function of consumer demand and supply of assets. The size of the consumer market, affluence levels, barriers to creating new assets and the cost of replacing assets are also factors.

Data bears this out. According to JLL, outer industrial precincts in Sydney achieved average growth of three per cent over the last year versus six per cent or more for inner city markets. Rents in east coast markets are forecast to rise between three and four per cent in the near term. This is partly a function of the tight supply, with the outlook for rents for industrial assets supported by rising demand, limited supply and rising land values, supported by higher quality, growth tenants.

The Australian industrial real estate market is only just beginning its transformation process to support the changing business environment. As such there will be ongoing investment opportunities in this asset class that has the potential to provide reliable future returns.