Earlier this month, I published a Logistics Viewpoints article discussing the prevalent factors affecting the global WMS market. I mentioned that the research process leading to the publication of ARC’s WMS Global Market Research Study includes interviews with executives from numerous WMS software companies. However, the interviews are only one part of the data gathering process. We also utilize trends from our many years conducting this research and complementary ARC research such as our Warehouse Automation & Control study. Finally, there is much third-party research that provides valuable context for our analysis. This includes macroeconomic data and research on complementary markets. Warehouse and logistics property investment is among the most complementary to the WMS and warehouse automation markets. CBRE and Prologis are global organizations that publish insightful logistics property research for regions across the globe. I find trends in this market to be especially effective at providing color to the developments in warehouse technology markets.
Globalization and International Trade
Prologis recently published a paper on logistics property obsolescence, the causes, and the implications of the process. This report provides useful insight into property dynamics and points out structural shifts in the global demand for warehouse capacity. For example, Japan’s economic transition from manufacturer to large importer of goods has led to insufficient quantities of institutional distribution warehousing to support imports. Prologis quotes CBRE research that estimates the Japanese institutional logistics market grew almost 200 percent, or an annual rate of over 10 percent, from 2006 through 2014. So, although the Japanese economy is growing slowly, this shift in supply chain networks and distribution patterns is supportive for warehouse and distribution investments and I believe it will likely spur investment in warehouse automation as well. Similarly, European trade growth has been substantially higher than the region’s GDP growth. This growth has led to warehouse property development in northern European port areas and inland hubs such as Lyon France and areas of Poland.
The E-Commerce Impact
CBRE has identified “technology” as one of three long-term structural shifts affecting industrial property markets (the others are globalization and demographics). The firm published a report discussing results from polls and discussions about technology’s impact on industrial property. The results, obtained from its Power of Three conference in Paris, show that e-commerce and online retailing is the factor expected to have the greatest impact on logistics occupancy decisions in the near future (50% choosing it as the technology likely to have the greatest impact). This is consistent with ARC’s research on the WMS and Warehouse Automation markets, showing that investments to support e-commerce and omni-channel fulfillment is still the predominant dynamic stimulating growth of these markets as well.
CBRE also publishes quarterly Marketview reports that provide updates on the regional industrial real estate markets. In its US Industrial Q2 2015 report, CBRE further notes that the structural changes of omni-channel retail and e-commerce will drive logistics facilities investment in markets of all sizes to enable quick delivery access to as many customers as possible. The growing demand for warehouse space in secondary markets in the US is partially driven by this e-commerce competition to deliver orders same day or next day. Amazon’s fulfillment center expansion into smaller facilities closer to population centers is probably the most frequently noted example.
The strength of the US dollar was noted a transitional factor. I agree, as exchange rates typically adjust over time unless they’re constantly pegged in a similar manner to China’s policies in the past. In contrast to US logistics property demands, Canada is coming off a situation-specific downturn in logistics property demand resulting from Target’s former facilities coming onto the market after the company’s retreat from Canada. Target Canada’s warehouse automation stock is likely to affect the warehouse automation market in Canada and the US as well.
CBRE’s recently published Asia Pacific Market Outlook noted much of the same factors impacting that region, stating that demand for logistics warehousing space will remain strong due to organized retail in emerging markets and strong growth of e-commerce. Similar to the US, e-commerce providers in China, India, and Japan are also locating fulfillment properties closer to population centers to reduce delivery times. Other factors positively impacting the region include increased use of 3PLs to achieve efficiency improvements and China’s gradual transition to increased consumption. Notable exceptions to the region’s growth include Thailand, due to political instability, and Singapore, due to labor shortages.
ARC’s ongoing research on the global WMS market recorded a post-recession uptick in WMS revenue growth. Although signs of this rebound appear to be moderating, numerous secular changes are contributing to ongoing investment in WMS and warehouse automation. Since the warehouse technology markets are clearly complementary to warehouse property, it is useful to monitor developments in this segment of real estate. The structural changes impacting the global industrial real estate market are consistent with the major contributors to growth in warehouse technology adoption. These changes, notably globalization and e-commerce, are contributing to warehouse space and technology growth rates above those of global GDP.
Global currency fluctuations have impacted trade and financial markets significantly over the last year. However, these foreign exchange rate effects typically have only temporary impacts on global imports and exports. Regardless, the logistics sector is likely to obtain a net benefit from increased outsourcing and trade. Meanwhile, investments in logistics technologies are also likely to increase as planning tools will be required for distribution network planning and facility reconfiguration will stimulate additional investment in WMS software and warehouse automation.