The disruption to physical retail by the online revolution, steadily progressing over the past 20 years, has jumped forward 10 years in 12 months, causing substantial obsolescence across the UK. Meanwhile, the ‘forced’ home working experiment has altered the future role and use of the office, with the likely outcome of causing aggregate demand to fall and companies, large and small, to review their future occupation requirements. Virtual meetings will additionally reduce business travel, impacting hotels and wider hospitality.
The logistics and industrial sectors appear to be the clear winners, with notable increased occupier demand. So how could the fourth industrial revolution of automation, robots and artificial intelligence (AI) further benefit this sector?
Location, location, location
Many assume that automated logistics operations could enable businesses to be less reliant on availability of staff and accordingly seek to minimise the cost of their real estate. However, we believe that automation will open up higher-value locations where staff availability and cost has previously been prohibitive for an occupier. Additionally, a focus on more direct-to-consumer operations, which also facilitate a business to retain a greater element of profit, will mean occupiers will focus on urban and edge-of city-locations.
Building design: Big box, mid box or urban logistics?
We continue to question what building size is most suitable for automation and will attract future occupiers. With such a diverse range of occupiers across each segment of the market, there is no clear answer here, but it’s key to ensure any building is not too specialised for one occupier. Also, the intensification of use is now leading to more innovative solutions in urban areas, from multi-storey warehousing to subterranean developments. Automation may facilitate further growth of this concept.
Impact on rents
Automation driving business efficiencies should mean each square foot is used more intensively and theoretically enable an owner to seek a higher rent and capture rental growth. We feel this will have a relatively small impact compared to the standard equation of demand and supply dynamics of a local market.
Considerations for our investment strategy
We have already communicated our decision to tilt BMO UK Property Fund towards industrials and logistic assets, given the strong fundamentals and compelling drivers for outperformance forecast over the next five years. One of the key factors contributing towards forecast performance from this sector is the fact that technology advancements represent significant opportunity for both occupiers and owners of these assets for a number of reasons.