Automation and robotics set to reshape New Zealand’s industrial properties

JLL research explains the place for robots and automation in the industrial market

October 02, 2018

Artificial intelligence (AI) and automation is increasingly becoming a hot topic of discussion in the real estate industry. According to JLL Director of Industrial Sam Smith, AI and automation will soon have a more widespread influence on the New Zealand industrial market as the cost of implementation decreases and early adopters pull ahead of the field.

"Increases to the minimum wage, rising input costs such as petrol, and a shortage of workers will drive greater adoption of automation and AI in industrial sheds. While building new technology into the humble shed has higher outlay costs up front, there is substantial cost saving potential downstream," explains Smith.

Local research shows that New Zealand's industrial market is enjoying a prolonged boom period, with Auckland's industrial space at a premium. Vacancy as at June 2018 was only 1.8%, the lowest ever since JLL's records started in 1993. Greenfield development opportunities are severely limited which has driven substantial increases in land values over the past 18 months.

"Industrial property values in Auckland are high due to the increased demand for locations close to key transport linkages which enable fast and efficient distribution to customers," says Smith. "Land which meets this criteria is in short supply and held in the hands of a few key players. Rising land values and construction costs mean that higher rentals are required to make new development feasible. Higher rents aren't the only factor businesses need to consider. Increases to the minimum wage, labour reform, free university education and rising input costs like petrol, mean the cost of doing business is increasing for many business while access to labour is becoming more difficult."

Like many other mature markets, New Zealand's population is ageing which, without high levels of new migration, will result in a decrease in the working age population. A potential solution to rising business costs and limited/expensive labour is for industrial businesses to harness automation and AI.

Industrial land values in Auckland have increased from an average of $305 psm in 2010 to $508 psm in 2018.

"Land is much more expensive, as are construction costs, so the rent required to make a project feasible is now significantly higher than five years ago. If occupiers are paying more per sqm then they need to be extremely efficient with how they use their space. Artificial intelligence and automation can help by utilising the same sqm more efficiently. Although new technology has a high up front cost, it will create long term savings. It would also mean that longer lease terms may be required as tenants wouldn't want to move premises every few years if they have installed a whole lot of new technology. Both the longer lease terms and higher rents are a good story for the growth of industrial property values in the future," says Smith.

A recent report from JLL Australia; Industry 4.0 – the implications on Australia's industrial and logistics real estate sector, explains that as automated solutions become more affordable and productive they will provide occupiers of commercial property all the requirements needed to increase the level of service.

"From an industrial perspective, this would mean increased access to stock and a more diverse range of goods provided in a shorter time frame and at a lower cost," says Smith.

The results of a study completed by Raconteur predicts that more than 1.4 million robots will be installed in factories around the world by 2019 with approximately 60% of warehouse functions to be replaced by technology of some description.

Robotics and automated processes will likely remove some lower end tasks. However, due to their existence in warehouses, new roles will become created such as robot technicians.

"The future of industrial warehouses is for ceiling heights to rise, so effectively having a similar or smaller footprint but a higher stud height i.e an increase in cubic metres. This allows goods to be stored more efficiently. Other considerations include having an additional area set up for the maintenance of robots and technology, building columns carefully placed for robots to operate around, slab design and floor loadings which can handle the load of an automated racking system, and level flooring to ensure robots can move around easily.

"Also an increase in energy use must be taken into consideration, which would increase the need for energy efficient buildings and access to suitable electricity supply.

"Multi-level industrial warehouses, although not clear span, would provide a solution in areas where land is scarce. Sydney Australia has two level industrial buildings such as small warehouse facilities that are embracing technology and robotics. In Auckland, Farmers has a warehouse in East Tamaki that is over two levels, allowing them to operate from a smaller footprint than if they were in a single level property and creating efficiencies through technology," says Smith.

One trend that could form a viable solution are CBD fulfillment centres which are multi-level. CBD fulfillment centres are usually found in urban areas close to end use consumers and are an efficient use of land in highly populated areas.

The concept of robots in warehouses is not new, but the pressure of rising land values and shortage of labour has led to change commencing in other areas of the world.

Smith believes that with changes to warehouse design led by the adoption of automation and robotics, longer term, thanks to automated cars and trucks, yard space may also be reduced.

"The reality is, change is ahead as advances in technology influence the shape of many businesses and brands and in turn industrial property," says Smith. 

"There are boundless benefits to making the bold step into automation and robotics such as speed to market, less worry about staff being injured on the warehouse floor, better working conditions, increased productivity and the ability to collect data on systems and processes to enable efficiencies to be made are just some of the advantages. However, there are some risk factors too, such as the business having the ability to repair robotic systems, being able to analyse the data produced, and the high investment up front means the business needs to be fully committed and prepared to benefit longer term. Rents for properties that meet the requirements of AI and robotics will inevitably be higher with longer lease terms, although the upside will be more cost effective distribution, and improved proximity and access to end users."

Improved processes achieved through automation and robotics has made good cut through in Australia. Toll in New South Wales, has adopted automation in their 32,000sqm state-of-the-art fulfilment centre facility, which has allowed them to handle up to 170,000 units per day at capacity and achieve improved speed to market. The automatic forklifts and efficiencies achieved through automation has meant employees do not need to walk for miles to find the product they are looking for. It has also led to increased accuracy in supply and in turn, less returns.

"Once the ball starts rolling in this space here in New Zealand, first movers should see efficiencies improve and in turn others will follow by adopting the technology. This change will undoubtedly be an exciting step forward for the industrial industry in New Zealand," he says.