Monday, July 8, 2013
Owners, occupiers and investors need to respond to unprecedented trends in technology, demographics and infrastructure that are transforming global supply chains across the retail, industrial and logistics sectors according to a new white paper from Cushman & Wakefield entitled “The Changing World of Trade.” The paper identifies winning strategies for adapting to the new “demand economy.”
They predict as the global recovery gains momentum the significant pent-up demand will result in significant growth in global trade. A projected return by 2014 to the long-term trade growth trend of roughly 9.5% per year could result in global trade flows reaching $45 trillion by 2021 compared to just $6.5 trillion in 2001 when China joined the World Trade Organization.
“In major markets around the world, countries are positioning themselves to capitalize on the growth in international trade by investing heavily in infrastructure improvements such as ports, airports, highways, railways, industrial parks and most importantly intermodal hubs,” said Maria Sicola, executive managing director and head of Cushman & Wakefield’s Research in the Americas. “Meanwhile, governments are focused on negotiating new trade agreements and easing foreign direct investment regulations.”
The paper describes rapid change in retail supply chains as the sector becomes more global, urban and specialized due to the rise of online shopping, mobile technology and changes in consumer spending patterns. To meet the demands being driven by e-commerce, technology and transportation costs, companies are actively streamlining their fulfillment processes – improving logistics to maximize efficiencies in inventory, service time and delivery – which is driving demand for high-quality space.
“Seismic changes in retail requirements are putting new pressures on shippers who are expanding to developing economies while concurrently struggling to adapt to the challenges of high-demand retailing in increasingly dense cities,” said John Morris, Cushman & Wakefield’s Industrial Services Lead, Americas. “In response to these challenges, logistics efficiencies, location and transportation strategies, as well as improvements in technology management, are having major impacts on distribution channels and real estate sectors alike—essentially re-writing the rule book on how goods are delivered to consumers, worldwide,” continued Steven Watt, Head of Pan-European Industrial & Logistics for Cushman & Wakefield.
John Strachan, Head of Global Retail at Cushman & Wakefield added: “The fundamental changes in retail since the recession in 2007 have altered customer behavior and created a new set of demands. Where the physical store was previously the primary point of distribution, now it may be the Internet. For supply chain executives, it means that they face a new set of challenges—integrating their fulfillment operations across channels to reduce cycle time and meet the needs of an increasingly demanding consumer.”
- World exports surged 20% in 2010 and 2011 even as economies struggled to recover
- Up to 25% of all retail sales in the U.S. and U.K. will take place online by 2020
- Intra-Asia trade has already surpassed exports to western economies
- Demand for industrial space in Vancouver increased 83% in 2H12 vs. 1H12
- Shanghai’s logistics and warehousing occupancy is greater than 90%
The paper concludes that winning strategies will demand flexibility and diversity, collaboration, automation, technology – and a keen balance of scale and scope, most likely through consolidation and vertical integration.
To accommodate the growing trend towards same day fulfillment and supply chain flexibility, regionalization will be required consisting of a network of smaller urban locations and large distribution centers. This will likely benefit some of the better-positioned tier II markets. Outsourcing to third party logistics (3PL) providers can contribute capacity and expertise without significant fixed cost investments. However, Cushman & Wakefield recommends that companies need to strongly consider controlling their own real estate, with cost reduction and technology continuing to drive location decisions and design parameters.
Logistics will rely more on improvements in the productivity of capital, utilizing order management and distribution automation technologies. In some markets, labor shortages and costs are making these investments an urgent necessity.
The required investments in technology and real estate will continue to put pressure on margins across all industries, with companies seeking economies of scope and scale. Scale will be attained primarily through consolidation. Scope can be attained by vertical integration, which is expected to drive greater demand for space. Today’s most advanced distribution facilities offer clearances of about 35 feet, energy-efficient lighting and green building materials.
Industrial Market Impacts
The U.S. is facing a potential shortage of class A Industrial space. Functional obsolescence in premium markets is spurring more redevelopment and retrofitting of existing facilities, while Industrial real estate demand in the southeastern U.S. has been propelled by relatively more affordable land. Greater transportation efficiency has spurred the development of intermodal facilities that serve as transfer points as well as logistics hubs and reshoring is likely to gain traction as labor costs become more balanced globally.
In Europe, activity has been mixed, with transactions taking longer to conclude due to the cautious outlook of many occupiers. However, locations such as Moscow, Warsaw and Berlin have recently seen encouraging levels of activity. Cost-reduction strategies have put the spotlight on prime quality space which has continued to decline while secondary space is becoming increasingly obsolete. Although this has placed marginal pressure on rents in some areas, it has also given rise to the re-emergence of build-to-suit developments, particularly space that requires a high degree of automation and technology.
Brazil and China have become dominant players on the global scene due to strong economic growth coupled with rising incomes. The real estate landscape in Brazil shows tremendous potential with industrial demand at its peak on the Rio-Sao Paulo axis. However, challenges remain such as poor infrastructure and a scarcity of suitable sites. In key Chinese hubs such as Shanghai and Beijing, traditional manufacturing assets are increasingly being replaced by value-added, high-tech industrial space. With a growing scarcity of land, companies are likely to explore buying existing industrial properties and renovating or rebuilding them to meet new requirements and higher standards.
“Costs in China and the growing integration of intra-Asia trade channels supported by a budding middle class point towards more demand for industrial space across most regional hubs,” according to Sigrid Zialcita, Regional Head of Asia Pacific Research Services for Cushman & Wakefield. In Shanghai, demand has once again exceeded supply leading to annual rental and capital-value growth of about 10% to12% over the last two to three years. With reasonable rents, abundant land supply and improving infrastructure, Hanoi in Vietnam and Manila in the Philippines present attractive options to large-scale manufacturers looking to relocate from other countries due to rising labor and operational costs.
The bottom line is that changing logistics priorities will continue to challenge corporate supply chain executives to develop solutions that manage current demands and plan for the uncertainties of the future. The pace of change regarding the demand for these solutions is unprecedented.