Publications

- September 1, 2021: Vol. 8, Number 8

Industrial’s next act: The future of warehouse lies in automation and AI

by Peter Lewis

Much of commercial real estate has undergone a nearly complete reimagination over the past 18 months as the pandemic upended traditional ways of work, life and leisure. While the impacts on office and traditional retail have been devastating — with both facing uncertain paths to recovery — the clear winner among real estate’s various sectors has been industrial.

More than any other real estate asset class, industrial has been largely impacted and continues to be shaped by the increasingly rapid rise of ecommerce, which is inherently tied to the advancement of technology as a whole. Although wholesale changes in other sectors have been well covered, the ongoing shifts in industrial have flown under the radar. While demand for ecommerce-ready warehouses and last-mile delivery facilities was already strong prior to the pandemic, the metamorphosis it is currently experiencing overwhelms anything I have witnessed in more than three decades in real estate investment and development.

While ecommerce is commonly viewed as the largest factor pushing industrial forward, a closer look at the sector reveals that the next phase of its growth will be grounded in online retailers’ increasing adoption of new technologies, primarily to integrate automation and artificial intelligence into their operations. While these tools are already present in warehouses run by many of the largest players in ecommerce, weaknesses exposed by the pandemic and rising demand for alternative asset classes are set to drive a whole new wave of technology-driven industrial development in the years to come.

The pandemic was undoubtedly a boon for the industrial sector, as it pushed tens of millions of previously brick-and-mortar reliant consumers to become regular, enthusiastic online shoppers. However, it also exposed numerous cracks in the global supply chain and the sector’s broader infrastructure, most notably the near-total dependence that warehouse operators have on manual labor. This proved to be the supply chain’s Achilles’ heel, as social distancing measures and broad stay-at-home orders sidelined workers and sent the exchange of goods into a deep freeze during the crisis’ early stages, both domestically and internationally.

Incorporating automation can help strengthen and better manage supply chains by utilizing predictive analytics to maximize efficiencies, reduce the rate of human error within warehouses, and generally bring down costs. Automated buildings are not susceptible to disease, do not need sick days, and can continue to provide last-day shipping of vital consumer goods in last-mile locations without delay, regardless of the environment outside of warehouse doors.

This technology also increases the potential for large-scale warehouse development in more rural areas. Undeveloped fields or infill sites can be remediated to provide ample space for automated warehouses where the lack of an available labor pool may have previously created an obstacle too difficult to overcome. These buildings will simply need just enough people to manage the robotics and automation systems, meaning that these remote towns and rural areas can transform into ecommerce and distribution hubs, attracting economic benefits and vital tax revenues.

Other advantages for the industrial sector lie in the development of cold-storage warehouses and micro-fulfillment centers, two increasingly in-demand asset types that are, by their very nature, particularly dependent on technology. Much of today’s cold-storage warehouses are decades-old, retrofitted warehouses that already require extensive technology for temperature control and consistent upgrades and modernizations to accommodate not just perishable and frozen foods, but also medical supplies such as vaccines and test kits.

Micro-fulfillment centers, on the other hand, represent a much newer and more novel concept. Most often located within large cities and other population centers — sometimes in abandoned retail space, automotive garages or other near-obsolete facilities — they enable close access to large numbers of consumers who now expect next-day or even same-day delivery. These facilities require the right technology to track and manage inventory and orders, and their success as an asset class will likely serve as a case study for how fully automated distribution centers can work on a larger scale.

For some investors, the growing nexus of technology and real estate has long encouraged them to pursue a strategy of not only owning real estate assets, but making investments in companies whose technology and products can operate within and optimize those pieces of real estate. For example, Latch, a full-building operating system of software, products and services designed to optimize building performance, and Dataminr, a data analytics firm.

We are seeing a new dawn for industrial in particular because there are simply very few other asset classes that have such a close interaction with the backbone of business as industrial does. As developers, owners and operators in the industrial space, we have a bird’s eye view into the efficacy and growth of specific companies, how they’re changing, and what technology they’re implementing. These same technologies are broadening opportunities for investors to improve warehouses and industrial campuses, such as automatic locks and tools that provide extra sources of electricity to power increasingly prevalent tools such as electric trucks. To be successful, industrial building owners must have their finger on the pulse of technology and what’s affecting the companies that use it.

Looking ahead, the industrial sector is likely no more than five years away from using AI-powered driverless trucks to deliver goods to consumers and businesses around the clock. This, in turn, could result in changes to infrastructure such as streets and traffic systems to safely support and enable these driverless delivery vehicles, and many warehouses will need to adapt in kind. This will include making sure there is ample power to charge vehicles; incorporate robotics in the packing and unpacking of trucks, and providing appropriately sized truck courts for easy navigation.

While these are undoubtedly boom times for industrial owners and investors, the sector’s runaway growth also creates a significant set of challenges for those players. An increasingly urbanized and tech-savvy population means ecommerce is poised for even more explosive growth in the years to come. To meet consumers’ growing demand for lightning-fast, reliable fulfillment of their online orders, developers and their investors will be under even more pressure to create modern last-mile delivery-focused warehouses in and around the country’s largest urban centers, where suitable land for development is already in woefully short supply.

While the market appears poised to continue its nearly unprecedented trajectory of growth, investors will need to identify new ways to differentiate themselves as they pursue consistent returns in an increasingly crowded field. While warehouses alone will maintain tremendous value as millions of consumers flock to ecommerce, those that can identify and harness the technologies that accompany these shifts will hold the key to industrial’s next chapter.

 

Peter Lewis is founder and chairman of Wharton Equity Partners.

 

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