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December 12, 2017

As the popularity of online shopping continues to skyrocket, more and more companies are being required to refine their warehouse, distribution and automation processes to enhance the experience and meet the needs of their customer base. A growing segment of the industrial and retail sectors, ‘dark spaces’, are providing benefits for investors by way of significant investment uplifts for certain assets.

Essentially ‘pick-and-pack’ warehousing facilities that are closed to the public, dark space warehouses are located within close proximity to their target customer for fast and efficient packing and delivery. By streamlining e-commerce delivery processes as a separate arm of the business, they aim to enhance service efficiency.

JLL Strategic Research Manager Sas Liyanage says the popularity of dark spaces has grown in recent years, as domestic retailers respond to threats posed by larger offshore online retailers.

“A failure to adapt is fraught with consequences, and remaining competitive by securing fulfilment assets in dense catchments has become a priority,” he says.

But these areas are suffering from a diminishing availability of industrial stock, with a large number of industrial assets being converted to other uses due to a lack of land availability.  Given these limitations, occupiers are paying premiums to secure locations for their ‘dark supermarkets’.

One such example is major Australian food retailer, Wesfarmers-owned Coles Group, which recently leased a 12,570-square-metre site in Sydney’s inner-city suburb of Alexandria. The Alexandria site is understood to have leased at a 50 percent premium to market rents, one demonstration of how these assets are providing strong return for investors.

The Woolworths Group opened a 7,000 square-meter dark supermarket in the neighbouring Sydney suburb of Mascot in late 2014. It recently announced intentions to open four new dark supermarkets, with one in Sydney’s Northern suburb of Brookville to service online orders in the city’s north.

But, according to Liyanage, dark spaces are not just appealing to food giants, with other retail companies starting to look at ways to utilise the asset class. Catch Group – which operates online coupon companies including Catch Of The Day, Scoopon, Mumgo and GroceryRun – has been operating a 25,000 square meter fulfilment centre warehouse in Melbourne’s Truganina since mid-2016.

JLL’s Head of Industrial for NSW, Michael Wall, agrees that the rise of dark spaces is providing promising opportunities for commercial investors and occupiers.

“Large organisations with a commitment to improving their processing and delivery times will invest heavily in dark spaces, often paying above-market rent to secure the right location. Businesses can’t afford to ignore how important it is to have proximity to their customer base and ease and efficiency in their delivery operations.” he says.

Wall says dark spaces are benefiting investors due to long lease commitments which protect the occupants’ core businesses, and that the positive performance of these facilities can help to offset the significant capital outlay in setting up such facilities. He also adds that the strong performance of the industrial sector over the past 15 years is further attracting savvy investors and occupiers towards dark spaces.

“Distribution centres were the second best risk adjusted asset class over this 15-year period in Australia – second only to regional shopping centres. This new wave of warehousing and distribution models – such as dark spaces – will continue to enhance the investment proposition for the industrial sector as a whole.”

But, Wall cautions of challenges for some investors with the key obstacle being the short supply of warehouse stock within close proximity to CBDs, as most industrial estates operate in the outer city suburbs where residents are more dispersed. However, he believes that these can also be seen as advantages.

“That is not to say that opportunities do not exist in the outer-city suburbs. For instance, Sydney is currently in the midst of transformation, with residential growth centres planned for the city’s western and southern districts. These developments will also create opportunities for industrial investors seeking to establish an efficient network of e-commerce delivery across the Greater Sydney region.”

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Michael Wall

Head of Industrial - NSW

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