CBRE Directors Moshe Greengarten and John Micallef tell MHD how e-commerce is changing the landscape for industrial real estate, and how companies should prepare for what’s to come.
Two years ago, Kemps Creek, a relatively unknown suburb almost 40 kilometres from Sydney’s city centre, was a tough sell. John Micallef, Director of Advisory & Transactions for CBRE’s Industrial & Logistics Operations, recalls trying to make the pitch.
“You would tell people about Kemps Creek and they would just ask: ‘Where’s that?’” he tells MHD. “You’d tell them it’s a new location, currently it’s just farmland and they’d tell you they would rather not go there.”
Fast-forward 24 months, however, and Kemps Creek is now one of the most sought-after industrial areas in Sydney. The game changer was Amazon announcing in June 2020 that it would be building Australia’s largest warehouse in the location. Not only did it represent a significant commitment for Amazon, but it put Kemps Creek on the map for industrial users.
“Now you show people a map, and say, that’s where Amazon is going, and they say: ‘No problem, that location works for us,’” says John.
The attraction of up-and-coming areas like Kemps Creek is part of a transformation of industrial real estate that John has witnessed as e-commerce has grown. Over the past two years John says he’s seen a major change in the size, scope and scenery of warehouses. John and fellow CBRE Director Moshe Greengarten share with MHD what the nature of those changes means for companies currently on the hunt for industrial real estate.
Deals are getting bigger
Amazon’s warehouse will be Australia’s largest ever built, at an astounding 191,000 sqm. This follows other recent major warehouses CBRE has negotiated including Quatius Logistics at 27,000 sqm, H&M at 27,000 sqm, Amber Tiles at 12,000 sqm and JB HiFi at 12,000 sqm. John confirms that the size of deals they’ve been seeing has increased remarkably as a result of the e-commerce boom, as well as companies wanting to be less reliant on other countries. He notes that a few years ago, the average request for a warehouse was 10,000 to 15,000 sqm. Now he is seeing average requests at 15,000 to 20,000 sqm.
“It used to be that people didn’t want to hold a lot of stock, they kept their inventory to the minimum,” he says. “They were following that ‘just-in-time’ model. Now it’s the ‘just-in-case’ model, where they want to hold more stock. Something could happen with China, shipping prices could go up, or a ship might block the Suez Canal again. During COVID you saw some companies with no stock to sell, which was a very dangerous situation.”
John says holding extra inventory makes a lot of sense from a business perspective. He notes that average warehouse rent is around five per cent of a business’s cost base. If a company opts for an extra 20 per cent capacity in their warehouse, it will still only form a small percentage of its cost base. It’s a small increase in the bottom line, he notes, but can greatly reduce the risk of not having any product on hand.
The consumer warehouse
While Australian warehouses have grown, they’ve also been changing location. John’s colleague Moshe notes that historically a warehouse was about having a large location just to store products, before shipping them to shops, and could easily be located on the far outskirts of town. With e-commerce, however, warehouses are moving closer to consumers, to accommodate direct to consumer deliveries.
“Everyone is looking to be close to the main arterials,” says Moshe. “You want to be close to highways so you can get to everyone fairly quickly.”
Moshe says Amazon chose Kemps Creek largely for its location and proximity to major highways, making it one of the most well-connected areas in Sydney.
In addition to getting to consumers quicker, Moshe says companies are also thinking about how their clients can get to them quicker, with the rise of click and collect.
This has not only affected the location of the warehouses, but also their design.
“Previously, people just wanted big open warehouses to store products, with a small office,” he says. “Now they are looking for the ability to split customer pick-ups from larger deliveries. They don’t want mums and dads picking up a box of products mixing with big trucks. It’s something we never saw a few years ago.”
Ready to automate
New technological demands are also phenomena that John and Moshe are seeing. High speed internet, for one, is an absolute must now for most companies. They are also looking for strong electrical infrastructure throughout the entire warehouse, and floors that are nice and flat, to be able to easily automate their warehouses. Amazon’s warehouse is set to be the largest fully automated DC Australia has ever seen.
Moshe says that a side effect of this advanced technology is the need for specific talent.
“Today’s warehouse workers are more of a specialised sort of worker. No longer are there just traditional forklift drivers, but drivers who focus on certain equipment. They are in high demand,” he says.
As a result, Moshe says companies are looking at amenities surrounding the warehouse, to ensure they can attract and keep the right talent.
“Companies these days are even more concerned with the comfort of their staff,” he says. “And it’s not just with fans and air conditioners within the warehouse, but also looking at the surrounding amenities. Industrial estates are these days offering a good quality of food, access to gyms, and childcare. All of these things are now being taken into account when choosing a location.”
Get ready for the squeeze
The rise in e-commerce and push for more warehouse space will likely see an increase in more multi-storey warehouses, Moshe notes. Amazon’s new DC will have a ground floor plus three levels, making it the largest multi-storey warehouse of its kind in Australia. Moshe says traditionally Australians haven’t had to look to multi-storey warehouses, thanks to ample land space, but current demand means those days might come to an end.
“There have always been a lot of questions around multi-storey builds because of their high build cost,” says Moshe. “We know we’re not as densely populated as areas like Hong Kong or Tokyo, but we’re running out of industrial zoned land. While previously lower land prices helped us accommodate single-level sheds, now we’re seeing a number of developers in south Sydney that are looking at multi-level.”
Moshe notes that it’s no coincidence that Sydney is seeing the biggest squeeze on industrial real estate.
“If you look at Sydney, we are bound on one side by water and the other by the Blue Mountains,” he says. “It’s hard to build industrial property on mountainous areas. There has been a bit more land coming on, but there is certainly still a scarcity of zoned industrial land.”
Moshe and John have seen the challenges this scarcity is leading to. They say companies looking for affordable options in a tight time frame face a tricky road ahead with limited options.
“Especially in Sydney, industrial vacancy rates are the lowest they’ve ever been, and rents are at record high levels. It’s really hard to find buildings for people,” says Moshe. “If people need a building in three to six months, they might have an option of maximum three buildings.”
Moshe’s advice is for companies to plan as far ahead as possible, to get more options and better terms on a custom-built facility.
“If a company is looking a few years in advance, then there will be eight to 10 developers fighting for their business. Effective rental costs could be up to 15 per cent cheaper,” he says. “Our biggest advice to industrial users is that if you want to get the best property outcome, think ahead.”
Work with a big player
Fortunately for CBRE’s customers, John and Moshe are well placed to support them throughout these changes. As the largest commercial real estate company in the world, CBRE specialises in finding the best fit for their customers.
“Some of the largest companies in the world partner with CBRE globally,” John explains. “We have some fairly strong relationships as a result of our size, scale and scope.”
John says CBRE currently handles around half of all warehouse lease transactions in Sydney of areas more than 5000 sqm. He says it’s the coupling of this footprint, along with a quality team, that creates great outcomes for CBRE’s clients.
“We have so many people on the ground, so we know what’s going on,” says John. “We always ensure we have a team of at least two to three people on every project. We are often a few steps ahead, as we know what buildings are coming up before they are advertised. Often people come to us after using another company, and we can find them three or four properties they didn’t even know about.”
“It’s going to be interesting the next couple of years,” he says. “With Amazon’s offering, you can place an order on a Saturday night and it shows up Sunday morning. It’s just incredible. When their big DC goes up at the end of the year, they’ll keep working at building up not just their product base, but also building up their customer base. A lot of companies are going to have to rethink their models.”
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