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Prologis Research says automation offsets only part of warehouse shortage

Logistics real estate shortfall could reach 140 million square feet

Prologis Research sees warehouse automation as partial offset to growing need for logistics space (Photo: Prologis)

The second installment in a two-part series on the benefits of automated logistics warehouses was published Wednesday by the world’s top logistics real estate investment trust, San Francisco-based Prologis Inc. (NYSE: PLD).

The company’s research team said the key hurdles facing the logistics real estate sector have been finding skilled labor and desirable locations for new sites. Additionally, limited last-mile delivery capacity is presenting further headwinds as parcel companies are turning away packages.

The first report noted a rapid increase in the adoption of warehouse automation as e-commerce growth accelerates. E-commerce fulfillment is three times more labor-intensive than other logistics operations, and absenteeism at logistics facilities during the pandemic has increased. Prologis sees automation as a way to minimize concerns over labor availability during the site selection process.

The second report stated that the availability of industrial real estate will be further pressured in the coming years as demand for e-commerce accelerates and companies expand the capabilities of their supply chains. Historically low vacancy rates and a decline in speculative construction starts have further limited available space. The analysis noted a potential shortfall of 140 million square feet of logistics space by 2024 as e-fulfilment footprints “must double in size” to accommodate the growth.

The fastest-growing adoptions in automation have been seen in mobile and semi-mobile applications, which are driving improvements in service metrics for supply chains. “Most adopters are more focused on shortening order lead times and improving accuracy to offer higher service levels and minimize reverse logistics costs than they are on increasing storage density,” the report stated.

Mobile applications typically only provide up to 10% of real estate space savings.

Full end-to-end fixed automation, including automated storage and retrieval systems, can cut the need for logistics space by as much as half. These systems allow more square footage to be used for storage as aisles can be significantly reduced or eliminated. However, costs and barriers to implementation of these sophisticated systems are high.

Automated solutions help but the need is growing

Automation could lead to slower growth in demand for logistics space if technology adoption were to accelerate quickly.

The group highlighted results from a base-case scenario wherein a “slight acceleration” in automation adoption would result in a 36 million-square-foot annual decline in the amount of space needed. That number could increase to 60 million square feet if users were to double the pace of automated implementations. The scenarios mostly assumed a quicker adoption of mobile and semi-mobile technologies.

Even with the potential reduction in needed logistics space due to increased warehouse automation, the research group sees a growing need for warehouses. Assuming GDP growth of 1.5% to 2%, increases in e-commerce sales, inventory builds of 5% to 10% as supply chains look to avoid future supply shocks, other supply chain modernization initiatives and increases in pandemic-related demand, net demand for space still totals 263 million to 353 million square feet per year through 2024.

Automation also has the potential to increase production and revenue generation per square foot. The group ran a scenario including adoption of both mobile and full fixed automation enhancements, which showed that revenue for e-commerce operations increases by 10% to 20% per square foot of space.

Facilities that have implemented automated technologies are also seeing longer leases.

The report noted that within one subset of customers, most of which have adopted automation, leases are more than 50% longer on average. Retention rates for leases on facilities with increased investment in automation, especially fixed automation, are expected to be higher as well. Productivity gains, including improved space efficiencies, are expected to keep tenants in their current facilities longer as they may be able to accomplish incremental growth without moving to a new location.

“The pandemic has accelerated structural trends already at work and reduced new supply, increasing the likelihood of a critical shortage of space. Automation can bridge this gap by improving productivity, enhancing capabilities and opening up new locations for logistics users,” the report concluded.

Prologis’ industrial real estate portfolio stands at $145 billion in total assets under management. The company’s nearly 1 billion square feet of owned and managed properties spans 19 countries, serving 5,500 customers. Many of its warehouses in the U.S. service ports on both coasts, regional distribution hubs, and rail and intermodal facilities.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.