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Industrial real estate owners

Why is integration with digital supply networks becoming increasingly important?

It’s late November and Thanksgiving is just around the corner! Andrea, a marketing executive in New York City, is planning to visit her family in Houston, Texas. She plans to give a set of wine glasses to her parents and goes to a nearby retail store. Unfortunately, the store has limited variety and the staff member directs her to the retailer’s website.

November 27, 2019

A blog post by Saurabh Mahajan, Manager in Research and Eminence team of Market Development, Deloitte Center for Financial Services

After logging on when she gets home, she chooses the design she likes and places an order for next-day delivery. A day later, in conversation with her mother, she hears that her mom had recently bought a wine glass set as well. She then contacts the retailer to return the wine glasses and requests a grill cookware set to be delivered in the next few hours, as she’s flying to Houston that night.

The retailer is quick to respond with an alternative to deliver the cookware set in Houston at a locker near to Andrea’s parents’ place. Andrea visits the locker the next day, takes the cookware set while returning the glass set, and the price differential is adjusted automatically in her account. She uses the grill set to cook a delicious meal for her parents and celebrates a memorable Thanksgiving.

Omnichannel strategy

Andrea’s story tells a lot about retail customers’ expectations of faster product delivery, easy returns, and seamless experience. Most retailers are trying to cater to these demands as stickiness and loyalty are low due to high competition from both online and offline retailers.

An omnichannel strategy that includes both a physical and digital presence along with multiple delivery options is becoming table-stakes to provide a more immersive and personalized experience to customers. These trends on the demand side appear to be making linear supply chains obsolete and increasing the need for digital supply networks (DSNs). DSNs use the latest technologies, such as IoT sensors and artificial intelligence (AI), to be more dynamic, interconnected, and transparent. As retailers increasingly move towards DSNs, they might prefer to choose supply chain partners, including industrial real estate (IRE) owners and operators, who are generally well equipped to integrate into DSNs and can help meet end customer expectations.

IRE projections

IRE owners and operators also face a scenario of slower demand growth, amid rising availability rates and sluggish economic growth.1 In May 2019, we developed an econometric forecasting model that projects demand for industrial real estate space and assesses the impact of e-commerce and other factors on warehouse demand. Based on the latest version of the model, we project the annual demand growth rate for IRE space to decline to 1.0 percent in 2023 from 1.7 percent in 2018.2 In contrast, we expect demand for an additional 900 million square feet of IRE in the United States, during the same period, led by continued growth in e-commerce.

Overall, the macroeconomic headwinds, tenant needs, last-mile delivery, and rapid technology evolution will likely reshape demand and warehouse space design. For more insights into our model, please refer to our detailed report on Future of Industrial Real Estate Market.

Changing mindsets

Given the above trends on the retail tenants’ side and the reshaping of warehouse demand, IRE owners and operators may need a shift in mindset and should think of themselves as key logistics partners in DSNs. They could focus on high growth areas and locations which are closer to customers and have more technologically advanced facilities.

IRE companies should rethink their property locations. For instance, they can have micro stations across major metropolitan cities, instead of one big facility on the outskirts, to accelerate last-mile deliveries. To have more properties at the right locations, owners should reassess their portfolio and make informed decisions on which properties to retain, sell, and acquire. In the past, many owners chose warehouse sites based on traditional factors such as land costs, labor availability, connectivity to major transportation systems, and tax rates.3 However, owners can now combine traditional data with newer data forms such as regional online sales, consumer lifestyle and behavior, and traffic movement and use advanced analytics techniques to make smarter location decisions.4

Through these steps, IRE companies can enable retail tenants to manage product deliveries better and eventually increase tenant convenience and retention. For legacy properties, which are away from prime locations and have low occupancy, IRE companies can collaborate with on-demand warehousing startups, such as Flexe and Flowspace, which aggregate underutilized IRE spaces to fulfill seasonal warehousing needs.5 They can also collaborate with startups , which operate integrated warehousing and distribution networks to provide more efficient and transparent delivery solutions to end customers.6 By collaborating with such tech startups, IRE companies can not only increase space utilization but also get more connected to DSNs.

IRE owners and operators may need a shift in mindset and should think of themselves as key logistics partners in DSNs.

Technology enhancements

IRE companies have generally lagged in technology adoption, but e-commerce players are making rapid advancements in managing warehouse operations. For instance, until a few months back, we were talking about workers scanning barcodes to make it easier for robots to track inventory in the warehouse facility. However, companies such as Amazon have now started to use AI cameras and scanners to automate the inventory tracking.7 This could increase process efficiency and help workers to focus on more important tasks, such as product packaging, to enable faster deliveries. These are lead indicators for IRE companies around the technology advancements in warehousing. They could also take cues to develop smarter warehouses that have advanced warehouse management systems. Ultimately, more digitally advanced warehouses could not only help IRE players to be more aligned to DSNs but also enhance tenant experience and operational efficiency.

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Endnotes

1 Saurabh Mahajan, “The future of the industrial real estate market: Preparing for slower demand growth,” Deloitte Insights, May 17, 2019.
2 These numbers are based on our Industrial Real Estate demand forecast model as updated on October 16, 2019.
3 Saurabh Mahajan, “The future of the industrial real estate market: Preparing for slower demand growth,” Deloitte Insights, May 17, 2019.
4 Ibid.
5 Emma Hurt, “Warehousing adapts to the e-commerce boom,” Trucks.com, March 13, 2018; Chris Cunnane, “The
on-demand supply chain market,” Logistics Viewpoints, September 5, 2018.
6 Kyle Wiggers, “Stord raises $12.3 million to digitize warehousing and distribution,” Venture Beat, April 17, 2019.
7 “Amazon introduces computer vision into warehouses,” Financial Times, July 1, 2019.

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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