What are the main drivers behind the changing face of industrial real estate in Australia?

eCommerce

eCommerce has changed traditional retailing forever – warehouses are the new source of goods, and the effect has been felt in traditional bricks and mortar retailing space – which has declined in line with increasing demand for industrial space in which to store, pack and ship packages. The most recent e-commerce industry report published by Australia Post notes the increased online spend over 2020, a trend which was accelerated by Covid-19. According to this report $50.5 billion, or 16.3% of total retail spend was done online. Despite this strong growth in online spend, comparisons with more established global e-commerce markets such as China (30%) and the UK  and US (~19%) indicate that there is still plenty of room for growth¹.

There is evidence that this increased online retail activity is directly benefiting Industrial property with the latest Industrial market update by Colliers noting that 44% leasing demand over 2020 coming from occupiers in the retail trade space².

Logistics

The need for faster, more efficient delivery of packages has led to increased tenant demand for metropolitan industrial sites. This has continued to position industrial as a highly desired investible asset class. In the largest industrial real estate deal in Australia – and a clear indication that well-placed industrial assets are hugely sought after by institutional capital – logistics real estate investor ESR paid AUD$3.8 billion for an Australian portfolio of industrial assets in a logistical play designed to “meet the growing e-commerce demand”.

At the same time, demand for large industrial distribution centres, as the first sorting point, particularly for imported goods, is also on the rise.

Manufacturing

The final driver of changes to the industrial real estate market is the renaissance of manufacturing in Australia. Clean manufacturing is on the rise in Australia, as a result of the so-called ‘fourth industrial revolution’, or the use of transformative technologies to connect the physical world with the digital world.

Trends such as the use of advanced automation and robotics, machine-to-machine and human-to-machine communication as well as artificial intelligence and machine learning are helping Australian manufacturers control two of their longstanding challenges – high labour costs and distance to markets.

Real-time access to production information, logistics and monitoring means better connectivity between customers and supply chains, as well as greater flexibility to produce differentiated products and services on a small scale.

According to a report by global management consultancy Bain & Company, automation powered by the rise of artificial intelligence, will be a key driver of change³.

What is particularly interesting is the prediction that the small Australian market is likely to be a real beneficiary of the effects of automation – because automation and de-scaling of production means that small markets can compete in a way they never could before. Some areas of manufacturing, which previously relied on scale, are opening up to competitors able to use technology to overcome size limitations.