Bill Page

Bill Page

Business Space Research Manager

Business Space

The rise of the machines

The proportion of online sales is heading rapidly toward 20% and consumers demand ever more reliable and speedy delivery.

As the processes servicing these needs become more innovative, the buildings that house those processes have to adapt.

By Bill Page, Business Space Research Manager, Legal & General

Man smiling

That Amazon box you probably received last week represents so much about the challenges and opportunities faced by both the UK economy and the built environment which serves it. Online sales, as a proportion of total retail sales, only became ‘meaningful’ (when they reach a fairly arbitrary level of 5%) as recently as 2008.

But now, the proportion is heading rapidly toward 20% and consumers demand ever more reliable and speedy delivery. The processes servicing these needs are also becoming more innovative. The buildings that house those processes, most of which were built long before 2008, are having to adapt.

UK productivity is 16-19% behind where it should be

This innovation is needed. Productivity in the UK economy overall is 16-19% behind where trend growth suggests it should be. And the logistics sector is predisposed to innovation. According to McKinsey, 60% of logistics functions could be automated, which puts the sector third in the list of industries ‘most susceptible’ to current employee functions being replaced by machines - behind accommodation and food services, and manufacturing.

The tech world is responding, and putting its money into these potential cost savings; funding into global supply chains and logistics increased from $921m in 2014 to an estimated $4.2bn in 2016, according to CB Insights.

Innovations that will change the logistics industry 

Understanding the implications of such change to logistics-focused buildings, such as warehouses and depots, is therefore of huge importance. We sifted through a variety of innovations, from the futuristic and exciting - like drones or autonomous trucks - to the less exciting but still important - such as apps that let companies piggyback on the supply chains of other firms. We identified three innovation groupings which we think will make the biggest difference to the logistics industry and the built environment that it requires:

  1. Sensors, tracking and data: Software’s ability to speed up processes and learn optimisation as it goes will revolutionise companies’ approach to supply chains
  2. Picking technology: The inevitable ability of robots to move to a destination and pick products accurately and carefully will be fundamental, and reduce the requirement for human labour
  3. Multiple “last mile” models: There is no “clear winner” across proposed methods of delivery. The future will see a mixture of solutions

We have identified the following implications these changes will have on storage and logistics fulfilment facilities, which we expect to play out over the short, medium and long term. And in property and construction, long term (10 years or so) does not mean something you can worry about later, as effects can be felt well within the length of property leases agreed today.

  1. Space requirements: As efficiencies grow, the requirement to store items reduces and the space requirement per item will adjust. However, continued online sales growth will negate overall losses of floorspace. Business models will be challenged, though; there will be disruption and insolvencies.
  2. Specification: Loading capacity for mezzanine floors will become more important; height requirements will increase and greater flexibility in docking will be required. Power and fibre reliability will be paramount. Vehicle fleet management will become more technical (think more laboratory than greasy tyre fitting) but we doubt yard requirements will grow; even if they do, space can be taken from a reduced need for parking as human labour dwindles.
  3. Location: Urban last-mile logistics fulfilment will grow in importance and will challenge land value hierarchies; we expect more conversions of retail parks, for instance. Meanwhile, purpose-built facilities in the densest cities will get higher, not wider, and cover a mixture of uses.
  4. Lease lengths: Urban logistics facilities will bear longer leases in the most successful locations, while in regional facilities the costs involved in automation will need to be amortised over longer leases.
  5. Obsolescence: Most logistics holdings were designed, built and let before e-commerce was mainstream. Modern facilities will not be immune. Facilities will need to be updated, or replaced, much more frequently than in previous years.

All this change creates opportunities for those who embrace change and look out for the opportunities it offers. As Bill Gates is wrongly attributed as saying: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.”

Bill Page is a business space research manager at Legal & General.

More information:

How do you think machines will change our lives in the future?

Join the debate and tell us what you think

Find us on Twitter @landg_group

Or tell us on Facebook or comment on our LinkedIn page