Distributing change: Effects of technological disruption on industry and logistics

Technology is changing the way the world does business, and the industrial and logistics industry is currently experiencing the effects of technological disruption. Utah’s industrial market has always played a part in the national economy due to its location at the “Crossroads of the West.” As the state’s economy has evolved, local industrial operations have taken on an ever-increasingly global role. As such, both local and global players can benefit from preparing their facilities to adjust to technological shifts occurring in the industry.

A recent CBRE Research report, titled “Automated Technology: Driving Change in Real Estate,” highlights some of the transformations taking place in the global supply chain and expands upon three of the major technological disruptors: Autonomous Vehicles, 3D Printing and Automation Within the Logistics Space (robotics). A short summary of each of these disruptors, including how this will affect commercial real estate, is included below.

Autonomous Vehicles

Self-driving vehicles are a constant topic in the news, but most people are too concerned with how it will affect their morning commute to consider the effects of driverless vehicles on logistics. As automated vehicles become more prevalent, major shifts in trucking, labor and warehousing will naturally follow.

In the U.S., labor accounts for approximately 75 percent of the cost to move a full truckload from Los Angeles to New York. At the same time, trucking companies have seen a decline in available drivers in recent years due to the long hours and safety risks associated with the industry. Per U.S. federal regulations, truck drivers are restricted to 70 hours per week, equating to roughly 400-500 miles per day. Labor is a top concern for U.S. trucking companies. Consider the replacement of these trucks with automated vehicles. This reduction in labor costs would result in lower delivery costs for the consumer and an increase in the total number of miles a truck is able to cover within a 24-hour period, supporting increases in e-commerce sales and a change in distribution structures. In short, the entire logistics framework of an organization will completely change.

This technology is quickly being tested and adopted throughout the globe. In April 2016, a caravan of roughly 12 self-driving, semi-trailers traveled more than 2,000 miles across Europe crossing four national borders. Organized by the Dutch Ministry of Infrastructure and the Environment, the trucks traveled from manufacturing facilities in Belgium, Denmark, Germany and Sweden to the port of Rotterdam in the Netherlands. As more successful testing continues to occur, adoption of this technology is rapidly increasing. According to a survey done by eyefortransport.com, a website covering supply chain logistics, 59 percent of respondents anticipate driverless trucks in their operations in the next nine years.

So, assuming this is the future of the industry, how can real estate users and owners prepare for the changes that will occur? There are three important ways in which automated vehicles will most likely affect industrial and logistics companies:

1. The decrease in labor and transport costs will ultimately result in the need for fewer warehouses. There is already a noticeable trend in the industry of users consolidating their warehouse space. As a result, it is likely that in the coming years there will be fewer warehouses built, but those constructed will be larger and in more remote locations.

2. Last-mile delivery facilities, the transport of goods from the hub to their final destination, must be able to accommodate large truck convoys and deploy electric city delivery vehicles, a common means for delivering products to the end-user. As such, these structures will need extensive battery loading stations.

3. Warehouse courtyards will need to be constructed in a manner that allows automatic maneuvering to accommodate the self-driving trucks.

3D Printing

3D printing is completely transforming the manufacturing industry — especially in the high-tech and healthcare segments. Some logistics companies have extended into the 3D printing sector and now offer 3D printing services located near their logistics hubs, creating a timely and efficient manufacturing network for parts. China has invested heavily into this technology as a means of lowering costs and decreasing its reliance on other countries for parts. 3D-printed manufactured goods only represent 1 percent of all manufactured products in the U.S., but the sector is rapidly growing. The global 3D printing market is on track to exceed $10 billion by 2018 and is expected to surpass $21 billion by 2020. Part of its quick growth is due to the fact that it can meet many of the most common challenges facing todays supply chain managers.

The impact of 3D printing on industrial real estate is not likely to be dramatic. It is possible that fewer large sites will be needed, with last-mile delivery points becoming production locations. But until then, raw materials will need to be shipped, so there will be more emphasis on bulk transport, which can potentially be facilitated by automated vehicles. Also, it would indicate less need for central hubs and more emphasis on last-mile distribution facilities.

Automation Within the Logistics Space (aka Robotics)

Robotics within warehousing has been steadily increasing for many years and this has resulted in a transformation of the labor component, altering the way operators configure and build their distribution centers and warehouses. Automation is becoming critical for the logistics space, but human labor will not disappear completely. There will always be a need for skilled laborers to make higher-level decisions that robots are incapable of making.

How will this rise in artificial intelligence and automation affect commercial real estate? As warehouses become increasingly autonomous, this will likely cause a shift in the way logistics facilities are built and maintained. They will require accommodations for more advanced technology, including IT infrastructure and new software programs that will likely be interconnected throughout the space, allowing for large amounts of data to be stored and analyzed. It is likely that this will increase the cost of building new facilities, affecting rents in the short term until these technologies are adopted across the industry. It could also lead to a new development cycle within the industry if current distribution centers are unable to adapt to the rise in automation. The use of robot picking systems will also lead to different requirements for daylight and ceiling height, stimulating high-bay warehousing, multi-layered developments and greater use of mezzanines. This may place further pressure on warehouses to become larger, with fewer sites and a leaner logistics network.

As advances in technology continue to alter the way we do business, disruptions within the supply chain are guaranteed to occur. Logistics companies, owners and operators who begin to prepare for these changes now will be best-positioned to remain competitive as these technological advances become mainstream.

Jeff Richards is a senior vice president in the Salt Lake office of CBRE who specializes in the industrial and logistics industry. He has particular expertise in industrial and flex lease and sale negotiations, as well as data center and clean room requirements.