Technological advances are generating opportunities and creating new risks for investors in the commercial real estate sector, particularly industrial.
One such change will come with the widespread use of autonomous vehicles. This technology will eventually improve the financial health of the trucking industry, while shifting the optimal location of facilities. There are likely to be fewer regional warehouses needed and more demand for high flow-through properties that speed the flow of goods to their destination, especially in areas where vacant land is in short supply.
Labor and fuel together account for almost two-thirds of the marginal cost per mile traveled by a truck, so automation will reduce a substantial portion of the operating expenses faced by the trucking sector. A follow-on effect will be an easing of the burden on carriers posed by union restrictions and labor regulations. Together, these factors will improve the financial health of carriers.
They will also permit consumer goods to travel longer distances to and from distribution centers, thus requiring fewer driver-related transition points.
Vehicle automation technology was successfully road-tested more than 20 years ago, but there was little financial incentive for automakers to provide the technology to consumers until recently. E-commerce and ride-sharing businesses like Uber and Lyft have led to a proliferation in the number of vehicle trips operated by a professional driver. Trucking volume has increased, but the number of drivers has struggled to keep pace. Since the mid-2000s, trucking companies have cited driver shortages as a constraint on the growth of their business. These shortages have resulted in higher labor costs and insufficient capacity to handle expected demand. Autonomous trucking will ameliorate this problem – at least for carriers able to finance equipment using the new technology.
There are likely to be two major phases in the adoption of autonomous trucking technology. The first is automation of longer distance routes. Much of this truck traffic is concentrated on highways where speeds are more stable and routes are fixed. While there are regulatory hurdles to be faced, we think widespread use of this technology is five to 10 years away. A more complicated phase is the final mile delivery to the consumer or to urban stores. Automation is still not well suited to reacting to unexpected disruptions or handling the movement of a product from a truck to a doorstep. These changes are likely more than a decade away.
And so higher efficiency will initially best be achieved on high-density, long-distance trucking routes. Federal regulations in the US currently restrict drivers to an 11-hour shift, limiting most truck trips to a 500-mile radius. Long-distance trucking shipments address this problem using truck stops and drop yards where trailers may be transferred to a new driver. Autonomous trucking reduces reliance on these facilities, though fuel stops are still necessary. Fuel savings from ‘platooning,’ where several trucks operate in close proximity to reduce wind drag, could even reduce the need for fuel stops.
Minimizing the distance
The impact on real estate from these longer ‘stem’ routes will be to highlight the value of infill properties suited for final mile delivery to consumers and stores. Because automation of this segment is far in the future, retailers will want to minimize the distance traveled in this segment. Today, many of these final mile facilities are reached from regional warehouses. Autonomous trucking will enable more of them to be reached within a day from a central fulfillment center or distribution center.
Fulfillment centers, sometimes larger than one million square feet, generate economy of scale for the retailer. They require large, inexpensive land parcels, which are more likely to be found away from urban areas. Historically, institutional investors have avoided these areas because of the lack of supply constraints and concerns regarding the liquidity of these assets. However, a critical mass of these facilities built by users would attract interest from professional investors. They would also generate user demand for smaller crossdock distribution facilities to handle freight needing to be consolidated or deconsolidated for the distribution center. Autonomous trucking will also generate demand for high flow-through facilities near ports, rail terminals and manufacturing centers. Containers carrying imported merchandise could be more efficiently repacked in a transload facility around the port and driven to a distant fulfillment center or distribution center. Cost savings from autonomous trucking could also make domestic manufacturing more profitable, lowering the cost of shipping intermediate goods for final assembly. This increase in manufacturing would also generate demand for related high flow-through trucking uses.
E-commerce is a major factor in the move toward driverless trucking. Consumer demands of online retailers are likely to speed the pace of adoption. Analyses from Shopify, Alix Partners and AT Kearney all show that speed and cost of delivery are as important as a product’s list price in an online shopper’s decision to purchase. In 2016, AT Kearney found that 25 percent of shoppers expect to receive a product within a day of ordering. In this environment, a trucking firm’s ability to inexpensively fulfill the retailer’s delivery promise in a timely manner is instrumental to the retailer’s ability to capture an online sale.
The cost savings possible through automation in the trucking industry are key to unlocking efficiency gains for retailers. Real estate that promotes this efficiency will increase in value as e-commerce becomes more widespread. Those properties that benefit most are likely to be found in urban areas proximate to the customers they serve and those around where these goods are made or imported. Distribution facilities, both traditional warehouses and high flow-through properties, in these areas are likely to be scarce and difficult to replicate, generating above average rent growth. In addition, the growth of fulfillment centers away from urban areas will generate development opportunities for industrial properties that support the large fulfillment and distribution centers.
This article is sponsored by Realterm. It appeared in the Investing in Logistics supplement with the February 2018 issue of PERE.