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An occupier’s view on the rise of a two-tier logistics market

As supply chains adapt to new realities, occupiers will focus more on the life cycle of a facility, says Matthew Wright, DHL’s vice-president of development.

Matthew Wright
Wright: “There will be greater focus on the life cycle of a facility”

E-commerce has irrevocably changed customer expectations – they demand a fast and convenient logistics experience, and as more B2B commerce moves online it will demand the same service. In order to meet these expectations, supply chain real estate has polarized – ever larger fulfillment centers in nationally or regionally strategic locations, supplemented by smaller last-mile facilities on the periphery of large conurbations. Decisions on where to locate facilities, in order to meet heightened expectations, will be limited by land availability. In large conurbations, where land availability is most limited, multi-story facilities may become more viable and logistics could displace other alternative uses.

Sustainability will become a mandate to operate in the logistics industry. Governments, cities and operators are committing to cut emissions and waste. Logistics operations are a major generator of emissions and therefore offer huge potential to capture savings. There will be greater focus on the life cycle of a facility – how the construction is sourced, what initiatives the building specification includes and how these benefit the future operation. The funding of these initiatives is currently shared between developer and tenant. Many of these initiatives have value beyond the initial lease term, reducing future voids, but we have yet to see this reflected in investment valuations.

Impact of automation

Digitalization will see greater adoption of technology to optimize operations and improve service levels. Logistics facilities are becoming increasingly automated with a consequent impact on building specification. Automation is driving a trend toward higher buildings to achieve greater pallet capacity and productivities. For example, DHL is currently developing a 538,195 square feet facility in the UK, which has a minimum clear height of 18 meters and part 28 meters clear height to accommodate an automated high bay. The operational height, racking and material handling equipment require a more exacting floor slab tolerance in terms of flatness and load-bearing capacity. Greater automation requires greater power supply, and when availability is limited the lead time to bring power supply forward is protracted.

While automation will impact significantly on logistics, people still matter. Technology will aid repetitive and highly physical tasks, enabling people to undertake more meaningful tasks that require management, analysis and innovation. An available source of skilled labor will remain fundamental to the choice of location. In an era of high employment, we are seeing the definition of prime locations blur or change. In the face of transient employment and strong competition for labor, occupiers could be tempted to move away from more established locations.

All of the trends discussed here will generate greater obsolescence in buildings. Occupiers will migrate toward more modern facilities as they seek to maintain and capture market share. A two-tier logistics real estate market will develop. This will not be the age of your father’s shed.