The idea of demolishing and rebuilding warehouses in a flourishing industrial real estate sector may sound counterintuitive.

But for a growing number of warehouse owners, the old buildings just don’t have what their tenants need.

Demand is surging for high-quality industrial space at reasonable distances from city centres. In Australia, one of the tightest industrial markets in the world, last year’s take-up of 3.2 million square metres was the second highest ever, surpassed only by the 4.3 million square metres leased in 2021, according to JLL data. 

And year-on-year rental growth of 15% globally, as recorded last October – one of the highest lifts ever – reflects the appetite for industrial space.

But ESG-credentialed buildings can be a dealbreaker. Businesses want warehouses that are automation-ready and with sustainability features to help them meet their net zero carbon commitments, says Annabel McFarlane, head of strategic research, Australia, JLL.

Investors are taking note, pouring cash into sites that have older buildings, with a view to redeveloping.

“Many investors adopted ‘income-producing land banking’ strategies in 2021 and 2022 and as a result the volume of capital invested in income-producing industrial sites that are redevelopment-ready totalled A$2.3 billion (US$1.5 billion) over the past 24 months,” McFarlane says, speaking to the Australia market.

“Investors are cognisant of the strong demand for well-located assets for last mile distribution, along with the risks associated with greenfield developments, including the absence of income and potential increases in land holding costs,” she adds.

Proximity is everything

Industrial rebuild projects have been more common in ultra-high-density cities such as Tokyo and New York City, where developable land is scarce. Online shoppers are increasingly demanding same-day delivery, so traditional warehousing on the fringe of cities has had to be modernised and centralised via demolition and rebuild.

But even in Australia, where more land is available, proximity to major customer bases is a key driver of the knockdown-rebuild trend.

For example, in Melbourne there was the A$95 million purchase of the 12.21 hectare IVECO site in Dandenong South, where the Aliro Group and ISPT are set to establish a premium logistics estate. Then there’s the A$230 million transformation of the former Woolworths distribution centre in Broadmeadows to support e-commerce, distribution, food and cold storage.

“We expect the redevelopment theme to pick up over the medium term and obsolescence of some older stock to be brought forward as building sustainability features become essential considerations for occupiers,” McFarlane says.

Design benefits

The economics behind redevelopment projects make sense due to the improved capacity of new builds and their lower running costs, says Richard Phillips, JLL Australia's head of supply chain.

He points out that older assets will be up to 11 metres high, while new assets can be 15 metres high and hold 40% more product on the same footprint.

Automation is only appropriate in new-builds or retrofits where properties are expected to be functional for 15-plus years, Phillips says.

“You can’t even put some of the simplest automation into older warehouses because the infrastructure doesn’t enable their deployment,” he says. “So, you’ve got buildings that are 35-plus years coming up for refurbishment anyway, plus the appeal of automation and increased cubic capacity all driving owners and developers to look at the viability of knock down and rebuild.”

Market consensus

Back in 2021, a survey of logistics experts in JLL’s The Future of Global Logistics report found 90% of respondents felt redevelopment of brownfield urban infill sites would be an important opportunity to meet growing demand.

“If you can’t do something to improve the building, then that will reduce its effective life, and demolition could be the answer. You need to look at how old the building is and how it can be adapted,” says Phillips.

“The automation journey will continue to push people harder than previously to review their buildings,” he adds.

Green goals

As important as automation to the evolving industrial and logistics landscape is the increasing imperative around sustainability.

This was reinforced recently by Germany’s Supply Chain Due Diligence Act, introduced this year, which requires large companies to observe social and environmental standards in their supply chains, including their real estate. With Germany being the fourth largest economy in the world, this will have global implications.

“Our research tells us that 54 out of the top 100 largest industrial occupiers have net zero targets,” says Renae Gasmier, JLL Australia’s head of sustainability consulting. “That means these gold-class tenants need to be in net zero carbon emission buildings and we are very aware there's an undersupply.

“The problem we're all trying to solve is how to retrofit and upgrade all those assets that are not net-zero ready. In the industrial space the answer will be a combination of demolition and reconstruction and retrofitting what's there already.”

This article was published 10 March 2023 on www.jll.com.au