As digital technologies spawned the e-commerce revolution, unprecedented demand for ‘sheds’ has emerged.

The growth of e-commerce has been both rapid and remarkable. The five largest e-commerce companies in the world, all created in the closing years of the twentieth century, now employ more than 800,000 people around the world and annually turnover just a fraction short of US$300 billion.

The largest of those companies – Amazon – today accounts for 43% of all global on-line sales and three-quarters of all online book sales. Little wonder then that in 2017, Amazon was responsible for 70% of all take-up in the UK warehousing sector.

Relatively smaller, but no less significant, are the pure-play e-retailers such as ASOS (founded 2000) or Zalando (founded 2008) – who have generated market capitalisations of £4.9 billion and €8.8 billion, respectively, following their transformation of online fashion.

In 2017, Amazon was responsible for 70% of all take-up in the UK warehousing sector

As an occupier, ASOS, for example, is unrecognisable from ten years ago when occupying 160,000 sq ft of warehousing space in Hemel Hempstead. Today, its portfolio is around the one million sq ft mark in the UK, Europe and the USA, with further plans for global growth.

In the Digital Age, pure-play e-retailers or e-marketplaces, together with the more traditional, and hence challenged, bricks-and-mortar retailers, are busy trying to create competitive advantage in a fast changing operational landscape.

To do so they increasingly look to real estate with the warehouse, both individually and collectively in the form of a distribution network or supply chain, being very much in focus.

The application of automation and mechanisation, now joined by robotics, augmented reality and the Internet of Things, in order to enhance supply chain efficiency, and with it e-retailer performance, has been significant but has generated mixed results. It has also led to a fundamental rethinking of business models, processes and, ultimately, real estate requirements.

Changing operational emphasis

The most discernible influence of technology on the physical operation of warehousing facilities has been a shift from ‘people moving to product’ to a position of ‘product moving towards people’. The days in which the fulfilment of an on-line order required warehouse pickers to traverse the warehouse individually picking items prior to distribution are rapidly disappearing.

Instead, picking technologies, robotics and automation are used to locate the required products, retrieve them from dense (and hence highly efficient) storage systems and then take those products to a central hub within the warehouse, where a human operative collates and prepares the goods for despatch.

In our experience, this has led to clients generating a three-fold increase in the throughput and fulfilment of orders, alongside a reduction in human errors, which in turn reduces the number, and hence, cost of enforced returns.

One such example is the development of Alibaba’s Smart Warehouse at Huiyang in the Guangdong Province of China. The facility became operational in July 2017 and is a model that the logistics arm of Alibaba, Cainiao, plan to extend to other key global industrial markets including Dubai, Kuala Lumpur, Liege and Moscow.

At the heart of the 3,000 sq m warehouse is a fleet of more than 100 automated guided vehicles (AGV) that are responsible for 70% of the work undertaken within the facility. According to Cainiao a human worker could historically sort through 1,500 products during a typical shift and would take 28,000 physical steps across the warehouse doing so.

The introduction of AGVs that take products to the staff has served to double the number of products sorted by each staff member and has reduced the number of steps they are required to take to less than 3,000. This is a story of increased efficiency. It is also one that positions technology as a remedy to worker productivity, not as an eradicator of jobs.

The application of this automated technology is also key to overcoming some of the labour market constraints operating within many developed global markets. Technology is being applied to mitigate against the risks of there not being sufficient human skills available to be put to task in the future.

Changing property requirements

As e-commerce companies, and indeed a broader array of industrial occupiers increase their investment in next wave technology, the type of real estate they seek, and the basis on which they occupy that space is liable to change.

Warehouses will show a greater degree of design variance. Industrial space will be urban, multi-user, multi-level and mixed-use as technology, land constraints and collaborative business models reflect in the physical product.

Warehouse specification will also bring greater consideration to environmental issues and will become more self-sufficient via the greater use of solar panels and waste processing facilities – particularly as these technologies become less cost prohibitive.

Such is the extent of technological input into a warehouse that, in our estimation, the fit-out costs of a modern warehouse is between two and four times the construction costs of the base building.

It is not uncommon for e-commerce companies to spend tens or hundreds of millions in fitting-out their space with the latest technology as they push for increased productivity. Given this, we believe that custom-made, built-to-suit warehousing will come to the fore in industrial markets.

As real estate continues to be a source of strategic and competitive advantage, occupiers will be prepared to work with landlords and make long-term commitments to product that suits their operational requirements, has the required levels of future proofing and protects their long-term capital investment in technology.

For the same reasons, we anticipate a push towards longer leases or, at the very least, more regular regearing of leases. The application of next wave technology to e-commerce supply chains is hugely complex and expensive. It will become more so as occupiers seek to apply multiple technologies to bring dramatic transformation.

An example is the swarm robotics technology that has been developed by Ocado. Bringing together robotics, motion control, swarmbased orchestration, an array of AI and machine learning applications, sensing and simulation, Ocado’s Chief Technology Officer, Paul Clarke, describes the platform as ‘the culmination of a load of competencies we have acquired over the years.’

Two things are striking. First, there is no time for standing still. The competitive advantage achieved through technology is only temporary, and necessitates continual innovation and the aggregation of technologies. Second, those, such as Ocado, who have been at the forefront of this innovation are likely to continue to lead.

It is little wonder then that Ocado, which started life as a food distribution company, is now positioned firmly as a platform business that offers technology based solutions, derived from their own experience, to those desperate to transform in order to win.

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