Talking Property | The rise of multi-storey warehousing

KH:
Hello and welcome to CBRE's Talking Property Podcast where 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 Kathryn House, CBRE's Australian communications Director, and I'm your host for this latest Talking property episode. Today we'll be discussing multi-storey warehouses. Sky-high facilities towering up to 17 storeys are common in markets like Tokyo, Hong Kong and Shanghai where land is pricey and in short supply. But could going vertical also be one of the solutions in Australia for ongoing supply challenges in the industrial and logistics sector? While we won't reach the lofty heights here that we have in Asia, some vertical projects are already underway in South Sydney, where the industrial vacancy rate is extremely tight at sub 1%. Indeed, CBRE's new multi-storey warehouse report has identified that approximately 15% of the total industrial floor space to be delivered in Sydney between now and 2027 will be in multi-storey developments. So to talk us through some of the drivers and what to expect going forward, I'm joined by Charter Hall Development Manager Jack Hansen, CBRE's Head of Industrial & Logistics Research Sass J-Baleh and CBRE's South Sydney Managing Director Nathan Egan. So, Sass you've just completed CBRE's Australian multi-storey warehousing report. Getting back to basics, can you talk us through what multi-storey warehousing is and how it differs from multi-level warehousing? 

SJ:
Yes. So a multi-storey warehouse is a facility consisting of more than one level increasing the usable floor space per square metre of land. Since they're built vertically, access is provided by a set of ramps, freight lifts, or conveyor system. And therefore, each floor can operate as an independent warehouse used by multiple occupiers. The upper floors also contain docks and doors and investors or developers will charge rent for each loadable square metre on each floor. Multi-storey facilities are typically three to four levels. However, they can reach up to 17 storeys as seen in locations like Hong Kong, Shanghai, and Tokyo. And clearance heights can range between three and a half and 10 metres. Multi-level warehousing is largely driven by operational efficiencies and can typically be used by one occupier and the rent is typically charged for lettable area on the ground floor. Now historically multi-storey warehouses have been developed within the densely populated areas of Asia, and in recent years these type of warehouses are appearing in Europe and the US and we are soon to witness multi-stoery warehousing in Sydney, Australia, as you mentioned. So we expect to see at least six multi-storey facilities being built in in Sydney just over the next two years. 

KH:
So why do you think we're starting to see developers go vertical in Australia? What's really driving it? 

SJ:
The key drivers for multi-storey developments are a shortage of land and it's firstly a means of adding new floor space to precincts that have no further scope for development on undeveloped land parcels. And secondly, high land values from the lack of land supply, creating greater scope for feasible developments with respect to construction costs. Also, you have greater demand from e-commerce related occupiers. And with that fast delivery requires goods to be stored close to consumers in urban infill locations. And as we know, warehouse space is becoming limited in urban areas and land is becoming more expensive. So a solution to this could be the development of multi-storey warehouses to make use of the limited land available whilst also being more cost effective. Now with respect to reducing total logistic costs, transportation represents a large share of overall supply chain costs for e-commerce and logistics operators, accounting for an average of 50% of the total. So occupancy costs on the other hand account for about 10%. So location really is paramount, particularly for those occupiers who transport time-sensitive goods and occupiers with a stronger requirement to lower transport costs, including things such as fuels and tolls, will have a greater capacity or elasticity to pay a rental premium. So based on these key drivers alone, the South Sydney market is really well positioned to accommodate multi-storey warehouses. 

KH:
That's probably a good segue to you Jack because at Charter Hall, you've just commenced construction on your first multi-level warehouse, the Ascent Logistics Centre in South Sydney. This development's going to unlock nearly 27,000 square metres of logistics space across two levels, including 5,000 square metres of A-grade office and some wellbeing amenity. Jack, can you give us some insights around why Charter Hall decided to go down this path and what the tenant response has been like? 

JH:
Absolutely Kathryn. We've been looking at multi-level across Asia for probably the last five years and you know, I think from the outset it was always clear to us that this was a direction that we saw the Australian market going down. And I think as Sass touched on, for us it was always the likely location being South Sydney. So we were lucky enough, I guess, to secure a site on the corner of Gardeners Road and Bourke Road in Alexandria. And I think from a fundamentals’ perspective, the proximity to arterial roads, the significant population within the surrounding area, we can reach approximately 54% of Sydney's metropolitan population within 30 minutes. So that was a really important driver for us. And then really it was then dealing with our customers, and I think the biggest feedback that we had from our customers, particularly with Covid was the inability to secure sites in this location to really meet that demand for fast-moving goods. And you know, I think the customer response was actually really positive when we were able to secure this. So from a tenant perspective, I think we were actually surprised at the positivity towards the approach. 

KH:
And how is the leasing going at this stage? 

JH:
Yeah, it's great. We've been able to pre-commit 80% of the facility prior to construction. So on the first floor and office we have Schindler Lift company and on the ground floor we've got Coles across the entirety. 

KH:
Great to hear it's going so well. So maybe this is a question for both of you, but do you see multi-storey developments working anywhere else in Australia? Obviously, it's really stacking up in South Sydney at the moment because of land costs and availability, but maybe first for you Sass, do you think the economic feasibility stacks up elsewhere? 

SJ:
Well, I think just for the South Sydney market it has the highest rent in the country. So it really does stack up from a rent cost perspective. And what we've done is we've compared average rents from six precincts within the Asia Pacific region where multi-storey projects are most attractive or prevalent and rents in some of these regions have varied from about $180 a square metre, that's Australian dollars. For example, that's in Beijing, to a high of $600 a square metre, which was in Hong Kong. So that South Sydney market average rent for super prime grade assets we're currently there in the mid-range of these precincts. So they're at about $325 a square metre. We are seeing however, multi-storey projects in the pipeline for precincts outside of the South Sydney market, but still within Sydney. There is close to 100,000 square metres of multi-storey floor space currently under construction, with most of these projects being speculative developments. So the pre-commitment rate for these projects that are currently under construction is at about 70% at the moment. And I think you mentioned before a lot of the new floor space expected to be delivered in Sydney over 2023 and 2027, 15% of that will be attributed to multi-storey developments. 

KH:
So Jack, is Charter Hall looking at this elsewhere? 

JH:
Yeah, we definitely are. I think probably the biggest inhibitor that we see at the moment is construction costs. So if you take a standard single level warehouse facility, say in Western Sydney, that might cost a thousand dollars a square metre to build once we go to two storeys. So that multi-level we're looking at anywhere from $2,500 up to $3,500. But going beyond that and even further to say three levels and above that could be anywhere in the range of $3,000 to $5,000 a square metre. So I think there's cost in, I suppose construction methodology really becomes important and I think there's got to be a bit more maturity in the Australian construction market to actually understand these facilities and really appropriately address some methodology of construction because I think there's been a lot of learnings that Charter Hall have gone through with this process and for our builders and design consultants it's been actually a big challenge, but I think we're pretty lucky that we've gone two levels, but the four or five, sixes and, and probably further I think it'll take some time. 

KH:
So construction costs definitely being one of those issues, but are there any other considerations for other developers considering multi-storey developments? Is there anything else that they really need to be addressing and looking at, do you think? 

JH:
Yes, definitely. I mean I think for Charter Hall we were really cognisant when we were designing and going back to principles on Ascent on Bourke that we didn't minimise the functionality that an occupier would typically expect and is probably used to within the Australian market. So it was really important for us to be able to facilitate, for example, B-Doubles and 90 metre articulated vehicles throughout the site. So on the ground floor we can load with B-Doubles, which is probably the primary source of transporting goods up and down the east coast. And then for 40 foot containers, which 19 metre AV's are used, we can do that on the first floor. So that was really important to maintain that functionality for our customers. And I think if you take Hong Kong or Tokyo and some of those examples, the types of vehicles and the methods of transporting freight are actually a lot more compact or in some cases rail. 

JH:
So there's sort of a differing approach there. I think being really Australian-centric is important. One of the other things that we were sort of toying with through the design phase was probably the height and at seven and a half metres floor to floor, which is where we are at Ascent on Bourke, we were sort of a bit apprehensive at the design phase as to whether that was too low. So you know, the standard racking heights in Australia, sort of on your standard single level warehouse might be anywhere from 10 to 14. But when we actually put that to our customers, I think what we found out was that the throughput and the fast nature of these goods meant that it actually wasn't that much of an issue. So I think height is probably not as big of a concern as we initially thought. 

And then with automation as well and the advancements that we're seeing there with the automated autonomous moving robots, I think that's also become less of an issue as well. Probably the only other thing that I wanted to touch on was just the, I guess the challenges of constructing to Australian building codes and you know, around fire safety or the implementation of council, you know, requests such as green roofs, that was, that was quite a challenge for the design team with waterproofing. But yeah, I think once we've got the learnings from that it'll become a lot easier. 

KH:
Nathan, that's probably a good segue to you in terms of the tenant considerations when it comes to multi-storey developments and how they're being received. Jack’s talked about height considerations for instance. I know you've been involved in a lot of the new multi-storey pre-commitments that have happened, so I'd be really interested to hear from you the kind of conversations that you're having with occupiers and what's really top of mind for them. 

NE:
Thanks, Kathryn. The biggest consideration when you're intensifying the use of these sites is traffic accessibility into the site and accessibility off the site. So it's the number one discussion point for all of these tenants. How are their inbound deliveries going to be handled? Is there any queuing, is there any bottlenecking with their outbound deliveries because they're choosing to be in this inner-city location. Speed to market is crucial for all of these operators and having that ease of access and efficiency of movement is the number one priority for all of these tenants in this space. So that comes down to design, it comes down to the road network and all of these tenants, they've got to have comfort on that, especially with multi-levels when you are having, as I said, that intensity of use of the site increase as they do. 

KH:
And what do you see that some of the other benefits of multi-storey being? 

NE:
The benefits are particularly for a market like South Sydney where the general product is older, established estates that might be 30, 40 years old. So the design and the features that are included in these new multi-level are generally offering better operational efficiencies than the existing product. And that's everything from the number of roller doors that allow simultaneous loading and outbound delivery. The hard stand areas that these new multi-level developments offer are generally more generous in size than the existing availabilities within the South Sydney market. The number of roller doors that these new developments have is generally two, three or four times more for the same size that they'd get with the existing product in South Sydney. And a lot of the existing product doesn't even offer awnings where these multi-level developments have covered breezeways, which allows all weather loading for these, these occupiers. 

So in some ways the product is much more advanced than what the alternatives are in the South Sydney market. And back to Jack's comment on height, although compared to more traditional industrial that offers 13.7 metre roof height in a market like South Sydney where speed to market is crucial and they're generally storing and moving fast moving goods, that height isn't as high on the essential needs list as other elements like covered loading multiple doors. And back to that existing stock and availability comment, a lot of them don't have much more height than what's being offered within these multi-level developments. So quite often these features that these new developments have outweigh what they might be getting in these traditional existing single level warehouses in South Sydney. 

KH:
Fantastic. And I know ESG, Jack, you mentioned before the inclusion of green roofs in Ascent with ESG becoming an increasingly important focus in industrial developments, what are some of the wins that you think can be delivered through multi-storey on this front? 

JH:
Well I think the standard ESG inclusions from an industrial perspective at the moment are really your focus on solar and at Gardeners Road and Bourke Road we've got 350 kilowatts on the roof. We've also got EV charging and having a rooftop car park, you know, gave us a really good opportunity to maximise, the EV charging facilities available. Some of the other things that we were looking at was enhancing it for the occupier and the employees that were using the building. So, we use our cross-sector approach with our office team to include end of trip because I think those sort of elements are really a blend between industrial and commercial. So that was a big consideration within this development. 

KH:
So Nathan, looking at these ESG considerations, I know from our conversations that there's a lot that can be delivered in South Sydney on this front. Can you talk us through the potential that you see? 

NE:
Definitely it's becoming increasingly important for tenants to have these ESG elements within any buildings they occupy. And back to my comments on the existing stock within South Sydney, that's generally say 30, 40 years old, these older buildings don't have any ESG elements to them. They might have solar if you're lucky, if the structure can allow that, but these new developments are really offering that ESG component that really aligns with a lot of the major users’ corporate goals in that space. 

KH:
Well, that's a great way to end the episode. Thank you so much for your time. While multi-storey warehousing isn't going to be the total silver bullet for the supply challenges in the Australian market, the only way is up does seem to be an appropriate adage for the South Sydney market and there's much to be learned from what's happening in overseas locations. Thanks for tuning into this latest episode of Talking Property with CBRE. If you like the show and want to check out more follow Talking Property on Spotify, Apple Podcasts or your favorite podcast hosting platform, you can find a link to our multi-story warehousing report in the show notes. And if you have any questions in relation to this episode or ideas for future podcasts, please email us at talking [email protected]. Until next time.