Traditional warehouse space still serves a purpose and demand isn’t going to drop precipitously in the immediate future. But while old-style assets will undoubtedly become less attractive, even if landlords and companies decide on the path of automation, there are risks in chasing future rewards.
“If tenants require more specialised facilities, this may not only drive up costs but also make assets less flexible when it comes to a change of tenant,” says Lucas Meaney, Associate Director, EY Oceania, Real Estate Advisory Services. “For landlords, that means they have to accept a larger risk being tied to the incumbent tenant.”
A landlord’s wealth is generally the aggregate of its property value, which is a function of the rental income that those assets earn. This means that any expenditure on a property, including upgrades to its automation capabilities, needs to be very clearly assessed against the upgrade’s ability to create a proportional uptick in rental income.
Adding complexity to a landlord’s decision is the lag between capex spend on future-proofing and realising the rental value of that. “The successful landlords will be the ones that can cater to their tenants. But with more intelligent capital integrated into the tenancies, these must also be managed.”
There is also historical inertia baked into the operational models of many industrial real estate players. With typically less volume in sales and leasing activity, industrial property responds to different drivers than other sectors which shift sharply according to population growth, interest rates and consumer sentiment. “Interest in the sector usually only ramps up when there is a key activity shift, such as a resources boom or change to delivery models,” says Meaney.
“Often the most successful investments for landlords have been the urban fringe located sites that can operate profitably as industrial tenancies, then when the city expands and their highest-and-best use is no longer industrial, the site is repurposed to residential, commercial or light-industrial,” says Meaney.
“It means that as consumer trends change faster and more dynamically, the future potential of industrial sites will have a greater bearing on its value and attractiveness today,” he says. It’s yet another thing industrial landlords and retailers will have to consider.
While many retailers and industrial landlords are on the front foot, keeping pace is as much a question of management strategy as it is finding the right approach to adopting technology and automation. “You’ve got to have a willing executive team in place,” says Conneally, “and if they’re not averse to change, they can be very successful.”