Ensuring the future of industrial and logistics real estate

ANY meaningful discussion around the future of industrial and logistics real estate cannot be divorced from how consumer preferences are evolving. Real estate observers typically track standard metrics of rents, occupancy rates and prices of industrial properties but it is useful to dive deeper into the rapid changes in how goods are being manufactured, stored and delivered.

A thorough understanding of these trends will shape the future of industrial real estate. More importantly, it will address the longer-term issue of maintaining demand for industrial and logistics facilities.

Pharma giant GSK recently announced the setting up of its new S$130 million manufacturing facility at Pioneer. The plant is powered to enable continuous manufacturing in small quantities of a wide range of varied drugs. This type of "high mix, low volume" manufacturing is a response to consumers' preference for goods that are bespoke and custom-made for their individual tastes and needs.

And it's not just in drugs but food too. The push for plant-friendly food points to a growing awareness that consumers play a part in protecting animal welfare and contributing to a sustainable and ethical supply chain. The rising popularity of meat alternatives will influence to a large extent how food is produced, paving the way for more food manufacturing facilities to be equipped to 3D-print food in a clean lab, to recycle food waste and distribute it in an efficient manner.

Rise of e-commerce

Supply chain disruptions in food and drugs are not new. For close to a decade now, retail players - landlords and retailers alike - have been confronted with the rise of e-commerce. Online shopping has disrupted supply chains around how goods are manufactured, stored and distributed.

In fact, shoppers are now putting pressure on supply chains to ensure product returns are carried out in a sustainable fashion without putting any more pressure on the environment. Most supply chains are built around the need to push goods in one direction.

Never has there been such a mandate for equally robust and efficient reverse logistics processes and warehouse space in which to execute them. Just imagine the journey that a pair of sneakers that do not fit has to take after the consumer puts on that return label and drops it in the mail. Each time those shoes are handled through the process on the way to the next customer, the retailer's margin gets slightly smaller.

Taken all together, these disruptions point to the urgent need for manufacturers to adopt Industry 4.0, to automate and digitise at the minimum, as they aspire to transition to cloud manufacturing. Manufacturing clusters such as precision engineering are going beyond robotics and automation and have embarked on a new manufacturing paradigm harnessing cloud computing, the Internet of Things (IoT), virtualisation and advanced computing technologies.

Where does that leave existing real estate in light of these supply chain disruptions? Is there a need for factories and warehouses to upgrade their facilities?

The short answer is no. With a stronger strategy around land use, there's an opportunity to develop manufacturing in tandem with developments in omni channelling.

Habitat by Honestbee was the first test case to demonstrate the possibility of integrating a large scale retail operation in a traditional industrial precinct. Situated in a 60,000 sq ft space, it features a high-tech supermarket and a dining area. All purchases inside Habitat are done through cashless transactions and there is an automated collection point. Both are world firsts.

To qualify for such space usage in an industrial zone, a maximum of 40 per cent of the space can be used as ancillary space while the remaining 60 per cent has to be used as industrial space.

There are other possibilities for integrating retail and industrial land use without having to re-develop these existing warehouses. It's not hard to imagine an existing warehouse being re-configured to retail pop-ups on the ground floor to allow distributors to take turns to showcase their products for a short period of time, allowing shoppers to see, touch and try products on the ground floor even as the products are being packed for distribution to malls. A sophisticated omni channelling system will enable shoppers to order their products on the spot at the warehouse and take delivery of them at their homes later.

If landlords can take advantage of this and lease the space to multiple tenants, they minimise the risk of incurring rental income losses when a tenant decides to vacate. Moreover, allowing alternative business operations protects the property from becoming obsolescent. Both landlords and occupiers would benefit from this. Landlords would continue to make profits, albeit on an ageing asset, while occupiers get to rent a space at a cost-friendly rate, which can contribute to a large amount of savings, especially in this increasing operational cost environment.

The question remains - with the advent of Industry 4.0 and cloud manufacturing, landlords of older industrial properties debate the possibility of replacing their facilities to keep up with technology. For instance, smart industrial facilities have specific building requirements. Fibre optic infrastructure, greater floor-loading capacity, and higher electrical loadings are some of the features a smart industrial property requires to cater to wireless connectivity and surging electricity usage.

That being said, landlords and logistics providers should not plunge straight in to enhance, replace or rebuild their existing facilities. They should first conduct their own feasibility study to make sure that their investment will yield benefits, and which is the best way to go about doing the enhancement or replacement to cater to the demand.

There is enough evidence of advanced manufacturing companies in Singapore which make use of their existing premises to improve productivity in their processes making use of the cloud. These manufacturers plug into an alliance of manufacturing resources and services supporting the whole lifecycle of manufacturing. In a highly advanced cloud manufacturing environment, precision engineering companies tap an alliance of designers, simulators, producers, testers and maintenance resources to find the most cost-effective way to manufacture any kind of goods from aeroplanes to home appliances.

Adaptive re-use of ramp-up facilities are also on the uptrend. LOGOS, a logistics specialist with operations across Asia, acquired an industrial site at Pandan Crescent late last year, an existing three-storey industrial property which it will re-develop into a modern ramp-up e-commerce hub at a total cost of around S$270 million.

These examples are encouraging. They demonstrate that Industry 4.0 practices can be integrated into existing infrastructure, and the extent of success is very much dependent on landlords engaging with end users to find out what kind of space they need.

Another major factor is the government. As the landlord of a large proportion of industrial land, its flexibility and openness to allow current B1 space usage to change in tandem with supply chain disruptions will be key.

Cutting down industrial land supply may delay further rental falls in industrial rents and prices but that is only a short-term solution. Demand for industrial and logistics space must be underpinned by fundamental shifts in manufacturing processes, and supported by robust real estate infrastructure that meets the needs of end users.