Featuring Christine Miller, James Jorgensen & Michelle McNally
Thursday 17 June 2021
JJ:
Hello and welcome to Talking Property with CBRE. A podcast in which our team of experts, our clients and industry specialists share insights into the way we live, work and invest through the lens of commercial real estate.
I'm James Jorgensen, State Director of CBRE’s Industrial and Logistics team here in Victoria and I'm your host of today's episode - The Future of Industrial and Logistics Property.
Today we're here to look into the future of the industrial and logistics property sector and expand on the bold property prediction for 2030 that I made in a LinkedIn post last year promoting this podcast series. Here I spoke about how e-commerce, consumerism, buyer expectations and technology will reshape the way our I&L sector looks in 10 years’ time.
Imagine deliveries of milk and eggs arriving at your door without you even knowing that your smart fridge has placed the order after it detected you were running low. The order dropped off on your doorstep by a drone, which was dispatched by robots from a second-generation logistic centre that was originally a suburban commercial car park.
To explore all of this, I'm incredibly lucky to be joined by a couple of industry experts. Michelle McNally, General Manager of Property at Australia Post, and Christine Miller, who is CBRE’s very own Supply Chain expert. Both are here to help me put some meat on the bones of these concepts and provide some valuable insights into some of these topics.
Thank you both very much for joining us, Michelle and Christine. It's great to sit down and chat.
MM:
Thanks James, I’m really looking forward to our conversation today.
CM:
Thanks for having me.
JJ:
Alright, well let’s get started and take a look at the future of the I&L property sector and some of the concepts that will shape the landscape. Let's be bold, have some fun and get all the crazy ideas we have for the future out on the table.
Michelle, it's great to have you today. Australia Post have released their e-commerce report for 2020 which provides some interesting stats on how the COVID pandemic changed the e-commerce landscape. Are you happy to share some of the key learnings from this report with us, which might provide some meaning of the importance of the futuristic topics we’re going to unpack today?
MM:
Sure James. Look, I think it's really handy if you're looking forward to 2030 it's actually a good idea to look back to 2020 and what happened and this report is a fantastic report because it really does pull apart what happened in e-commerce and the shopping trends that happened during the year and what is that going to mean looking forward.
So, some of the interesting statistics from last year is that over 2020, four out of every five Australian households made a purchase online. That's about nine million households, or 82% of the population, and this included last year 1.3 million new households buying online for the first time. So that was a huge change and a lot of that was actually due to COVID and obviously lockdowns in various states and not being to shop and social distancing etc. This increased engagement that happened around e-commerce actually meant that e-commerce grew by 57% year on year, which is just huge and an estimated around $50 billion of online purchasing occurred last year. So the really important statistics, though is the percentage of total online retail sales that accounts for and Australia Post estimates that to be around 16.3% of total sales. And, you know, looking back in 2019, we didn't think we'd get to 16% of retail sales until 2023. So, really, this has been a huge change, structural change in e-commerce, driven by COVID and what happened last year.
One of the interesting things around that is actually the debate as to is this new behaviour sticky? Are the customers go to continue to shop online? And what we're seeing in the last couple of months is still very elevated levels, of online shopping and Australia Post looked at these 1.3 million new households and quite carefully worked out are they going to continue to shop? Is this just a one off for them or is this a change of behaviour and what they’ve shown in the last couple of months is that are still continuing to shop so these shopper buying habits are actually sticking and many of these new shoppers, who have converted to regular shoppers. What we're also seeing, is that the shoppers are actually also shopping more frequently, even the ones that have were shopping the year before and that frequency levels are quite high as well. So, it leads us to believe that there are some I suppose what we call ‘sustained participation’ is actually curing or the stickiness of e-commerce and that was actually supported by an ABS, Australia Bureau of Statistics survey that was done on the household impacts of COVID-19 and that survey was done and a third of respondents indicated that they prefer to shop online more now that they did prior to COVID. So that doesn't necessarily mean they’re substituting it, they're just saying they're more comfortable with buying online. So it is really quite an extraordinary events that happened during 2020 and it really has paved the way for a significant change in the market and we're seeing that play out in industrial property and a lot of the retailers are resetting their networks and resetting their plans, looking ahead to prepare for sustained growth in e-commerce.
JJ:
Thanks for sharing that, Michelle. It is fascinating to hear how much of an impact COVID had on accelerating this whole e-commerce, which was booming anyway. As we see from those stats, consumerism and e-commerce, make the world turn, really, and at the moment big organisations are spending billions and billions trying to come up with the algorithms and technology that'll help automate our buying process so that they can fill our orders without us even placing them.
So that example is before I think about fridges that reorder supplies on our behalf because we're running low or smartphones listening to us and arranging for that latest pair of Nikes to be delivered to your door by the time you get home, because it just eavesdropped on you having a conversation with a friend that conversations was in person, not even on the phone. It all sounds convenient and pretty scary, particularly the last part.
Artificial intelligence and machine learning are the concepts at the heart of this intrusive convenience. Christine, as Head of CBRE’s Supply Chain consultancy busines, I'm probably taking you a little bit outside of your normal scope here. However, I imagine that you are exposed to these concepts through conversations with clients. You're also a mother of two teenagers and I dare say you would find some of this, particularly this smart fridge pretty convenient. Do you have any insights on this for us?
CM:
Yes, I definitely do and we absolutely need a smart fridge. It would have allowed us to avoid the crisis that occurred this morning when it was identified that there was no bacon in the house. So we need that technology quickly.
If we look at artificial intelligence, yes, it would be great to have that convenience but what drives that convenience is actually artificial intelligence to be able to plan demand and this is where occupiers and retailers can now take this technology and if they can get better at forecasting, demand and forecasting is hard, there's a reason it's hard is because you need to take all these inputs. Artificial intelligence allows for a higher number of inputs to be analysed, that then allows for the forecast to become more accurate. If forecast can become more accurate, inventory levels can become more accurate and stable. That will allow for the distribution needs in terms of size to become more accurate and more stable. That ultimately will roll into the property industry, allowing for occupiers to be more specific about their requirements for lease terms attached to different sizes. So, I think the sooner we can get more AI into the demand planning we will absolutely see an impact to the way property can support businesses in terms of their distribution.
JJ:
Interesting, well answered. The next topic on my list here is autonomous vehicles and drones. Michelle, in your role at Australia Post, the biggest parcel delivery provided we have, was this a topic on your agenda and are you looking at how to do things more efficiently and with more control in this regard?
MM:
Look, it's really interesting in terms of, you know transport is a significant cost in Australia Post’s network as with any supply chain both in terms of cost and time. So technology investment in the transport area is only going to increase. I suppose from an Australia Post’s perspective, I actually see that coming together with the focus on carbon emission targets and how that's driven through transport as well. So really, we’re coming at this from quite a few different angles and looking at energy efficient carbon neutral vehicle fleets as well as the safety perspective. We've recently rolled out electric vehicles to place our postie bikes, and that's all about ensuring their safety but also more energy efficient. But also we can actually deliver more parcels which is really around a more efficient process as well for us. So we're coming at it from quite a few different directions.
In terms of looking out right into the future and you know my personal view and this is not necessarily the view of Australia Post but I think autonomous vehicles will be more impactful rather than drones. I think they will probably be more acceptable by the community and probably drive efficiency earlier. If you do go online and do you do look at what's happening overseas, you know there are pilots occurring or tests occurring particularly in America around very large line haul vehicles being tested and I feel that with the first area that we'll see autonomous vehicles in multilane roads. Very simple, straight line, point to point transport and many of those targeting to have fleets on the ground in 2023, 24, 25. So it's potentially not long away, but it will take a long time for a replacement to occur, but it's definitely something that's going to be happening this decade.
JJ:
Yes, thanks, Michelle it's not far away at all. So, on that topic Christine, if we're only a few years away from autonomous vehicles and drones. What sort of impact do you think that they will have on the design of warehouses and logistic centres going forward? Will occupiers need to change their design and layout to enable the property to interface with these vehicles?
CM:
Absolutely and I think this technology, I agree with Michelle is a lot sooner than we might be cognisant of. If we look overseas in the US, UPS has just placed an order for delivery in 2024 for what they're calling an E.V.T.O.L, which is an electronic vehicle that can have vertical take-off and landing. So if you can envision what would be produced if a helicopter and a small regional jet produced a child. it would be this cargo capacity of up to 600kg of cargo, that would be an electrical vehicle that can actually land on top of the distribution centres. But as their electric, they need charging stations. So we're going to start to see these types of requirements come into those facilities, so this would be a vehicle that could actually then bring product into a last mile distribution centre with autonomous vehicles and or drones then really taking that last mile but that could then be the way to get product from the primary industrial areas into these last mile fulfilment. So, we will have to start thinking about space as well as charging stations for the future of these vehicles.
JJ:
More hard stand, dedicated drone landing on roofs, it's really is quite fascinating.
CM:
It'll change the way that we really see transportation, and it's happening quickly. So I think we'll definitely see this with deliveries coming in 2024, they're expecting things to be operational by 2027, 28.
JJ:
Amazing before the 2030 that we're making these predictions for. Ahead of schedule already.
MM:
I think James, I suppose from my perspective, I think it's going to be interesting around is a whole social acceptance of some of these things as well, which I think is going to be part of what’s going to track this timeline. I feel that you know people have seen the slow creep of this technology, but I think having drones fly around and deliver things in that capacity, I think that will be part of the rollout as well as is social acceptance of this change.
JJ:
Yes and then also the environmental impacts that you were mentioning before. I hadn't considered that, but I think that will fast track some of these changes as well. Not just money making, corporate money making, it's also the sustainability aspect.
So, onto automation and robotics, the topic that most occupiers want to talk about. Theoretically, they allow more efficiency and greater utilisation of a warehouse, they speed up and improve accuracy when picking and packing orders and they should allow us to get closer to achieving deliveries of product within hours rather than days, which we as consumers all want.
Where do we currently sit with automation and robotics and what are the challenges? Michelle, I'll ask you to answer first.
MM:
Well James, I suppose Australia Post has increased its automation in its network substantially over the last five years and that's really been required to meet the volume growth that has been experienced. So, what we have been finding it's definitely delivering a faster service, it's providing greater tracking capabilities of the product so you have better visibility of efficiency or performance of our network and importantly and importantly it's actually increased safety of our people as well. You know, that’s not to be underestimated. That's a really, really important part of automation.
We also have a significant automation programme ahead of us as well to keep up with forecasted growth in volumes but one of the challenges I suppose we're facing, which most other people that are upgrading their supply chain is around getting that automation from overseas. Demand is actually high globally and this equipment is very difficult to secure. So, you know, I think that will potentially create its own problems over the next couple of years, as globally everyone's looking to actually drive these efficiencies into their supply chains.
Interestingly, you did mention around same day service and we do have same day service for some of our customers. It's a small percentage, but that percentage is likely to increase as e-commerce retailers increase their competition to get a greater market share. But interestingly people don’t always want same day service so much as they want a reliable delivery window and knowing when their parcel is going to arrive and the choice of where it arrives as well. We’re trialling some technology right now to provide customers with a window, a delivery window to notify them when their parcel is going to be delivered and it's really in all of this technology. You actually have to make sure that you're applying it to solve the problems or make life easier for the end customer. So it's not necessarily always the big bang, it can be a smaller sort of application of technology to augment that the network to actually deliver the service to the customer that they're looking for.
JJ:
That's another interesting point, it's not just about fastest delivery times but choice and getting those delivery times, right for the consumer. Christine on that point, what are you seeing now and what do you think we'll be seeing in 2030?
CM:
I think we're going to see a lot of change between now and 2030 in this area because I think up until right about now, we've had heavy steel based fixed automated solutions and there's a lot of technology now that's coming with a bit more flexible installation into existing sites. It comes at a more manageable CAPEX. I think the other thing that will see happen is I think we're going to see this integration of the human processes with those that can be automated. I've heard them referred to as ‘hubot’ solutions. So I think we'll end up with robots or automation handling a portion of the process in the warehouse and having that interact with the processes that are better handled with human workforce. I think we'll see that integration become more acceptable and more of a normal way of operating. Taking advantage of the optimisation of technology to match the right process. I think that'll get more creative in the coming years.
JJ:
Christine, the hubot scenario that you just mentioned. Traditional roles that we see inside a warehouse in this hubot scenario, what do you see the humans doing versus the robots?
CM:
I think if we saw the humans doing the part that requires increased dexterity and complexity, so a lot of the item picking that needs to be done in e-commerce, particularly when the products vary in size, shape and weight. That's easier done with a human solution but whereas the replenishment of product into the actual e-commerce picking lines could absolutely be done by robots quite efficiently. I think touching on the points that Michelle made about safety velocity through a facility, you could drive all of that as well as, a high accuracy in the picking process by combining that technology.
JJ:
Now if we talk about the properties themselves and there's been a lot of discussion over the last couple of years about last mile logistics and also probably multistorey, I'm not sure anyone's quite figured out what last mile logistics quite looks like yet. But I wanted to introduce another topic today that's closely related second generation or repurposed facilities becoming parcel hubs and perhaps these last mile logistics outlets. An example of this, as I look a decade ahead, might be if we're all in Uber style autonomous vehicles, perhaps commercial car parks become somewhat redundant and may be converted into parcel delivery hubs in densely populated areas. Christine, what are your thoughts on this, do you think that that’s feasible?
CM:
I think it's very viable when we look forward, because one of the learnings I've had about autonomous vehicles is apparently, we won't all have one. So, we will be in this common user structure, so there will be that infrastructure. I think what you'll see is the location will be really important in terms of being connected to that delivery catchment population, but I think you're going to see demand exceed availability. So, I think we might even have an opportunity for not only multistorey for second generation locations but also mixed use within those urban areas. If we're talking about last mile distribution, you could have commercial on the ground floor and then parcel distribution happening on the upper levels and I think we're going to see as that e-commerce penetration continues to grow, demand for these infill locations will exceed supply. So I think there is a great opportunity to re-use in the future some of these spaces that we won't be using potentially for car parks or other transportation.
MM:
It's interesting, Christine, just on that, even now in some markets, we’re really struggling to get those infill locations. You know, over the last few years, many traditional industrial locations in the city have been rezoned to residential and other types of uses and it has locked out, now those opportunities just aren’t there. I think in the short term, in some of those locations you will be seeing, you know, shared facilities coming to play because, there really is not lot of options when we go to some markets and we are quite frustrated in terms of looking for solutions. So, I think there will be some innovation occurring James earlier than what you might think.
JJ:
I couldn't agree more with you, Michelle. Just looking at Victoria, we've got record low vacancy rates, constrained land supply and a lot of frustration with occupiers and not a lot of choice. So, I do think that this topic is going to come on faster than anyone expects and we'll be talking about it a lot.
MM:
And in some respects James, we are already doing this now. It's really interesting with our electric vehicles, our EDVs we create out stations for them because of I suppose, the travel distance that they have and proximity to their rounds etc because posties actually deliver about 50% our parcels actually, which most people don't actually know. So we're already putting some of these in existing shops, for example, where there's no longer a demand for retail in this neighbourhood locations where we purposing them and putting them into shop fronts and delivering out of there. So we've had to be quite innovative in where we're putting these things, and I think that that will actually create more opportunities for discussion for how you integrate these facilities because they required, you do need to be close to the customer and we do need to be in those locations.
JJ:
That's a great point Michelle and so you’re already doing it. Can I ask, was that a reaction to the increased demand that you saw last year and you just had to start thinking creatively or was it part of a strategy?
MM:
It's a bit of both. I think in reality it is very much driven by vehicle type and electric vehicles that we’re using have certain travel time or distance, so it requires them to be placed within, I suppose, within a location to service the rounds and that meant we had to go into some locations that were densely residential and didn’t really have an industrial location. So, it was sort of a driven out of need, but what we did see was the ability for the market to respond and to repurpose some of these locations.
JJ:
Now, on multistorey Michelle, Christine just touched on it with repurposing car parks and those sorts of things. But if we look at, new development in multistorey, I think everybody would agree that it's probably a case of when not if and we will get there. But if you're a betting woman, what year do you think we see the first multistorey warehouse developed here in somewhere like Port Melbourne?
MM:
James, I do you have a betting account, it doesn't get used very often, mainly around Melbourne Cup but that’s about it. So I'm not a great better but in terms of Port Melbourne look, I know there are various developers with designs for multistorey. So they’re there, they’ve got their site selected. You know, they are looking for a pre-commitment tenants so I think it is a matter of when it will happen so I imagine a few years. I think markets like South Sydney, you know, the land prices there so much higher that it really does support it from a feasibility perspective earlier then say, some of the Melbourne opportunities. But the close proximity of Port Melbourne to the dense population definitely puts it in the right place for multistorey to occur there and in a few years’ time, I would think.
JJ:
I think you’re right, I think it's coming pretty quickly as well. Well, that's just about all we have time for today, and I should probably let both of you busy women get back to your days. However, before I do, I can't let you go without asking you both for your bold predictions for 2030. So, a tough ask but in three sentences or less give me something to hang my hat on please Christine.
CM:
My prediction is that e-commerce sales will be well north of 25% of total sales, and we will have multistorey facilities. They will be common user facilities with multiple tenants in the urban locations.
JJ:
And what about you, Michelle?
MM:
Well, it's pretty hard to beat those predictions, so I was going to add one on the top. For me, I think the automated vehicles will have a huge impact on location and where we'll be building our industrial facilities into the future. If you think about it, if we're no longer reliant on a changeover of drivers and people can actually work 24/7 with an automated vehicle, it potentially opens up a lot more locations for logistics hubs, places we wouldn't have ever considered.
JJ:
As an industrial leasing agent, that’s music to my ears. Just more spots we can do deals, that’s terrific.
Well, thank you very much to both of you for joining me today. I really enjoyed the conversation and thanks to our listeners for tuning into this episode of Talk Property with CBRE.
If you like the show and want to listen to some of our other conversations, visit cbre.com.au/talking-property or subscribe through Apple podcasts or Spotify. You'll find episodes on place making real estate market outlooks, disruption in the industry, creating resilient assets and more.
Until next time, see you later.
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