Real Estate Forum - October 2015

Canada and Mexico. John Morris, C&W’s industrial services group leader, says, “The future of manufacturing here will depend on how well industries and governments work together to address the competitive challenges needed to ‘seize the moment’ and take full advantage of the trends that favor North American production.” The report also says critical factors include labor costs, proximity to customer, time to market, currency volatility and transportation concerns—all of which are addressed by logistics.

Drew Hess, senior director of the invest-
ment group at American Realty Advisors,
tells Real Estate Forum, “As logistics has
grown, industrial real estate experts have
preferred to build and buy space that caters
to logistics users. While logistics tenants
include large credit users and smaller local
companies, these tenants have demon-
strated they can pay more for space that
adds value to the supply chain beyond dead
storage. The growth in the sector has led to
better occupancy, performance and rent
growth over cycles. The risk-adjusted
returns, low re-tenanting costs, and excel-
lent liquidity have further attracted institu-
tional interests from large core buyers, sov-
ereign wealth funds, and industrial-focused
public and private REITs.”
The design and development of indus-
trial buildings has been greatly affected by
logistics. Andrew Mele, a principal at
Trammell Crow Co. on the East Coast, tells
Forum, “From a design standpoint, class A
industrial buildings have gotten bigger,
taller and far more sophisticated. Quality
site design is also more important than
ever, since what happens outside the build-
ing has become almost as important as what
goes on inside. Ingress/egress, employee
parking, trailer storage, site security and
expansion capability are vital to sophisti-
cated logistics operations.”
Mele adds that many of these changes
have taken place over the past two decades.
“The first wave of modern supply-chain
reinvention, in the 1990s, saw an emphasis
on reducing costs through consolidation.
Smaller facilities spread across the country
were phased out and replaced with large-
format, super-regional distribution centers.
As demand grew and consolidation
increased, these buildings continued to
grow in size, making buildings larger than
one million square feet common in larger
consumer markets. In addition to increas-
ing in size, these buildings were much more
likely to be built with cross-dock loading
design, higher ceiling heights and parking
areas for trailers.”
Pat Ward, founder of MetroGroup Realty
Finance, relates, “A big building in the past
used to be 200,000 square feet to 300,000
square feet. As a result of logistics, it is com-
mon to see buildings in the million-square-
foot to 1.5-million-square-foot range.”
Also, Ward adds, with these larger build-
ings has come great consolidation.
“Companies formerly had 10 to 15 regional
hubs with smaller buildings. Now they have
consolidated into these larger, more
sophisticated buildings in three to four
hubs throughout the country.”
And yet, the sector is demanding a
greater variety of building sizes in order to
meet its logistical concerns. Mele says,
“Not long ago the number-one priority in
the logistics world was cutting costs within
the supply chain. While cost containment
is still important, innovation is now being
driven by other priorities such as greater
speed to market, product customization
and, above all, customer satisfaction.
Without a doubt, this innovation has been
led by the growth of e-commerce and
online retail.”
The result, he adds, will be “demand for
a variety of industrial product types as
users conclude that one building cannot
solve all of their logistics requirements. At
one time, consolidation was the goal, but
those days are over. Big-box distribution
centers, midsized fulfilment/sortation
centers and smaller local service centers
are all required for a well-coordinated dis-
tribution network.”
Mele points out that the emergence of
e-commerce and online retail has led to the
latest-generation buildings having even
higher ceiling heights and more available
space for car parking to accommodate the
larger labor force required by these opera-
tions. “Whereas once containment was the
highest priority, speed to market, product
customization and customer satisfaction
are critical to the success of e-commerce
retailers. As a result, we will likely see the
return of smaller buildings playing a role in
the supply chain for sophisticated users as
they conclude that one building cannot
solve all of their logistics goals.”
Logistics has also definitely increased the
focus of industrial development on flexibil-
ity, Adam Mullen, managing director of
CBRE, tells Forum. “Oftentimes, facilities
are customized inside the four walls to sup-
port business requirements. If spec, the
more flexible the better—higher clear
heights, ability to handle high-power
requirements and column spacing to sup-
port racking and automation.”
Other business requirements, including
extreme optics around location, have
arisen due to logistics needs, Mullen adds.
“Proximity to major hubs, ports and popu-
lation centers, and the majority of supply-
chain and logistics costs are freight/trans-
portation related. If a development locates
in a sub-optimal location relative to trans-
portation, it may not be as marketable. The
perfect location delivers low freight costs,
great labor, the best incentives, proximity to
as many people as possible, competitive
real estate costs and so on. Developers
know you can’t have all of it and should be
keenly aware of the various trade-offs and
how they impact their project.”
The landscape for identifying ideal
buildable sites for industrial properties is
growing increasingly competitive, says
Marc Lebovitz, principal of Woodmont
Industrial Partners. “At the end of the day,
the location of the building and its acces-