Peter Jones (Prological) on warehouse selection in a tight market

According to research from Prological, JLL and Pedavoli Architects, businesses and occupiers are being forced to change the way the plan and design their warehouses in a tight industrial property market. We sat down with Peter Jones, Managing Director at Prological, to discuss the changes taking place across the development lifecycle.

Prological partnered with JLL and Pedavoli Architects to release a whitepaper on navigating the industrial property market. Why did you earmark this area to report on?

The historical average for vacancy rates in the industrial real estate market is around 4-5 per cent. Australia’s two biggest cities, Sydney and Melbourne, are currently running well below 1% per cent, so the market is very tight. For businesses wanting to move to a greenfield facility, the competition for available land is even more intense.

In parallel to this, ESG is now a key consideration for businesses building what Prological calls ‘next generation’ warehouses. The market is leaning towards more bespoke warehouse design, but next to zero vacancy rates with high demand is making this difficult. The available land is controlled by developers, who would prefer to be delivering reasonably standard, traditional type buildings using the familiar systems, structures and partners.

Businesses now know a bespoke building will improve their operation, but we have market conditions that don't allow that to take place readily – a two-to-three-year lead time is required by the occupier in the current market to access a next generation warehouse.

As a consulting firm, our ambition is to help the consumers of the Australian supply chain industry in all its breadth operate more efficiently and continue to allow Australian businesses to be globally competitive. The industrial real estate market is a challenge to that outcome at the moment.

Why should businesses plan 13 years ahead when selecting a site? Is it a challenge to establish clear business objectives?

The reason for the indicative ~13-year plan is because with the current vacancy rates, you have to factor in around three years from conceptualization of your new warehouse until you move into that new facility. On top of this, next generation warehouses with a significant amount of automation require a 10-year return on investment to make economic sense. The challenge for many is that if you don’t have automation it’s very hard to compete service-wise and from an OPEX perspective with competitors who do.

The single biggest challenge for businesses looking for a new site is establishing objectives and projections to have a reasonably good view of what their business is going to look like in 10 years. This is complex and there’s no getting away from that complexity, but factoring flexibility into plans, including the array of possibilities that exist to the left and right of those projections is crucial

This forward planning will become more important for businesses wanting to maintain competitive advantage in their sector. As more companies take on automation, the pressure will grow on those who don’t, because These businesses will not be able to complete on order fulfillment times nor order fulfillment costs.

According to JLL’s supply chain team, the majority of Australian occupiers have to hold 30% more inventory than pre-pandemic levels. Do you expect a rise in inventory levels to continue?

A just-in-time (JIT) supply chain philosophy took root during the global financial crisis from 2007 through to 2009. This became normative over the next 12 years, but the pandemic disrupted our ability to control global supply chains to the level required under JIT processes. The answer was more inventory. Coupled with this, B2C exploded and effectively duplicated a lot of inventory that was already sitting elsewhere in the national supply chain.

These and other factors lead to the 30% increase in national inventory as we emerged from the pandemic.

Economic rationalists will slowly start to reduce this over the next few years. Big data and artificial intelligence – which are still new but emerging tools – will bring new capability and predictiveness to forecasting, which will help improve inventory management greatly.

Whilst I don't think inventory levels will return to what they were pre-pandemic, they will certainly come back from where they are, and that will only help to open up more industrial real estate.

According to the whitepaper, occupants are moving out of Sydney because of mass rental increases. What implications does this have on the national market?

We think that in the next season, businesses will be reviewing their national networks and network strategies. This will in large part be driven by the cost of real estate.

Sydney’s industrial precincts went up in price by 22% in the inner west and 40% in the outer central west since early 2022, which is driven in part by this supply and demand cycle, amplified by the sudden increase in national inventory.

Melbourne, by percentage, has increased even more than Sydney, but comes off a much lower cost base. Before the pandemic, desirable warehouse facilities in Melbourne would cost $70 per sqm pa, whereas now the market is at $130 to $150 per sqm in the more advantageous geographies such as Truganina, Altona and Lavington. The new northern industrial precincts are slightly less, but then inner-city and southeast Melbourne are in the main more expensive.

Real estate has become a much greater cost in businesses’ supply chain structure. The economics, especially in Sydney, are becoming prohibitive to business.

Sydney has been central to Australia’s ideal network design because you can supply 65% of Australia’s population overnight using road transport. A distribution centre in Melbourne falls back to serving just over 50% of the population overnight, so service is compromised.

We think we will start to see more businesses expanding their footprint to two or three facilities – Melbourne, plus Brisbane, plus Perth for instance. That three-city network covers 80% of Australia's population overnight in lower cost real estate areas, while reducing CO2 production and freight costs when compared to a centralized network. This is a new option to the high costs of the Sydney-centric network while providing improved access to customers.

What do you expect the uptake of solar-powered warehouses to be like in the next few years?

For now, there’s no state or federal compliance requirements around carbon reductions, solar or energy production for on industrial facilities. However, most businesses have detailed targets and progressive governance process around carbon reduction. This means for most new facilities, energy generation and sometimes storage is a criteria for the sustainability goals of the occupier.

The challenge is most of the developer-led developments put an arbitrary solar system on the roof of their new facilities, without it being designed for a particular client to cater for the scale of the business or future plans. This allows the developers and the tenants to tick the box on solar with the accompanying sub-optimal outcomes.

The limitation with this approach is translated in the energy costs – at best businesses can offset between a third to half of their energy costs with these standard installations- a missed opportunity. Research – funded by Prological – by Craig Pickup through the University of Wollongong’s Sustainable Buildings Research Centre (SBRC) found design installations increases energy benefits to over 60%, with the opportunity to increase advantage even more with the installation of batteries on large-scale, high usage facilities.

The advantages of these energy systems is still evolving, but there is movement in the right direction. Opportunities lie in properly designing the systems, balancing a of the many factors, including the angle of the roof, specification of the solar panels and the direction the building is facing. These elements need to be married up to what’s happening inside the warehouse while considering energy curtailment, minimum and peak loads.

All of this data is measured against a levelised cost of electricity equation, which is an international standard used to predict future costs of electricity for that particular occupier.

With such tools, there is a real opportunity to embrace solar in the industrial environment, much like we have in residential property.