Top 10 Industrial Real Estate Trends to look for in 2017
Ware Malcomb CEO, Lawrence R. Armstrong shared his thoughts in an interview with BISNOW on the Top 10 Industrial Real Estate Trends to look for in 2017.
From foreign entities investing in properties across international borders to the volatile U.S. political climate affecting neighbors like Canada and the global stage, the New Year will shape future industrial real estate trends. Over the past few years, the rise of e-commerce has led to growing demand for large distribution and fulfillment centers, while the continued dominance of intermodal shipping has overtaken an industry dominated by direct truck delivery. The entire supply chain, from warehouse to last mile, has been affected by matters of technology, security, politics and consumer desire.
We spoke with Curtis D. Spencer, president of IMS Worldwide and thought leader on intermodal logistics and shipping trends and practices on an international level, and accomplished architect and business leader Lawrence R. Armstrong, CEO and LEED AP at Ware Malcomb. From building design to shipping practices, they offered 10 insights into the changing industrial CRE landscape.
1. A Needed Increase In Inventory Space In The U.S.
Consumers are calling for more goods at faster delivery rates, causing retailers to keep up with demand by increasing inventory volume in the country importing the product. “Supply chains will have a two-step process: whatever it takes to get it into the country, and then just-in-time once it’s here,” Spencer said regarding the United States. “We could see more goods held in inventory in the U.S., because e-commerce is driving us to daily delivery, and just-in-time manufacturing is not going away.”
2. Inventory Space Is Going Vertical
While the demand for more goods ready to ship domestically has grown exponentially, the available land to build holding space has not. As parcels shrink and become more expensive, Armstrong said architects are designing vertically to increase a warehouse’s square footage without increasing the physical footprint. “Land is getting to be more expensive, so like any other product type in commercial real estate, you end up going vertical,” he said.
3. Politics Will Have A Major Influence On Foreign Direct Investment
In 2015, JLL reported over $20B in total investment in industrial real estate and 37.5% of buyer activity came from foreign companies investing in property in the U.S. Canada, China and other countries have acquired assets outside of their borders, making international importers a major component of today’s borderless marketplace. The American political climate going into 2017 will either help or harm this trend for all involved. Companies abroad may be subject to new security criteria under a Trump administration.
Or things might go in the opposite direction. “As Trump is also a real estate mogul, you could see more foreign investment in real estate,” Spencer said. “So, there will be two different outcomes depending on how that rolls out.”
4. Shallow-Bay Buildings Will Become More Popular
New types of multi-tenant buildings have grown popular in the wake of e-commerce. Called “shallow-bay buildings,” these more compact fulfillment centers are built for fast, often two-day delivery, which is a significant aspect of last-mile logistics. “We can accommodate smaller importers with shallow-bay buildings, so that’s been kind of a trend we’ve seen, definitely in the Southeast,” Armstrong said. The buildings must also be much closer to the end user than ever before, and require infrastructure like larger parking lots to support a growing number of employees, Armstrong said. It’s a trend that will increasingly grow around the world’s major urban centers
5. LEED Certifications Take A Back Seat For Industrial Properties (But Not Necessarily Efficiency)
Pursuing LEED certification in the industrial sector remains a costly and lengthy process. “I think it’s really the process and the expense and the time commitment to get a building certified in the industrial market. Companies don’t seem to be as interested in doing that,” Armstrong said. As sustainable construction methods become commonplace, certifications might be more for show than actual efficiency. “Sustainable design has become mainstream now, so it’s just part of the deal. [Property owners] seem less motivated to go through the LEED certification process.”
6. Intermodal Shipping Will Remain A Dominant Force And Continue To Grow
There has been a recent surge in intermodal shipping, with an emphasis on freight train delivery. Big-box development has flocked to industrial parks surrounding dry, inland intermodal terminals, according to Spencer.
Cargo ships are still a reliable mainstay in global shipping, but intermodal has eclipsed even recent infrastructure improvements seen in the world’s key ports. “You look at the overall international shipping, and with the use of the Suez Canal in the early 2000s and mid- to late 2010s, and then upgrade of the Panama Canal last year, you would assume that those would be largest impacts in international shipping,” Spencer said.
7. Transportation Management Systems Will Become More Sophisticated, Seamless and Mobile
Spencer said while the intermodal supply chain process might on the surface list seven or eight entities involved in delivering goods to the local distribution center, there are numerous hidden players at work at any given time and location. An effective TMS ties all of these steps together into a cohesive process, from warehouse to doorstep. Spencer anticipates communication among shippers will evolve into a seamless, mobile format in the near future. “That’s what I think are some of the big emerging trends in technology,” he said. “People are going to get that trade management software completed into a seamless system.”
8. Security, Both On the Ground And On the Web, Will Grow In Importance
Both cyberattacks and physical ones reached new levels of sophistication and damage in 2016. In anticipation of these growing threats, industrial spaces, already properties with an eye toward safety and security, are equipping themselves with tools necessary to protect goods and employees. “If it’s a manufacturer or a distributor, security and protection of product flow is very important and has become a much bigger issue,” Armstrong said. “Sometimes we are required to secure an entire site, and [create] multiple levels of security to get from the driveway to the front door, it just depends on the client, the product and the process.” With specific security needs tailored for each country’s own legal requirements and standards, protection has become a crucial asset to industrial CRE.
9. Importers Will Increasingly Look To Foreign Trade Zones For Tax Breaks And Better Shipping Times
Goods that enter from a foreign country are subject to an often lengthy and costly customs process. In a designated Foreign Trade Zone, the goods technically have not made entry, creating a financial break for importers. “The FTZ Program streamlines that process of getting the goods in, available for just-in-time delivery and then managing the paperwork that it’s coming,” Spencer said. More specifically, FTZs have utilized a weekly process since 2002 that streamlines duties, fees and taxes.
There’s also a pricing break. “They reduce [the] customs processing fee from $500 a shipment, down to a fixed $500 a week by using the FTZ,” Spencer said. “That saves several hundreds of thousands of dollars on the average to every big-box user.”
Already Houston, Dallas and Phoenix have seen an increased use of Foreign Trade Zones. Importers in these cities benefit from state tax cuts offered by Texas and Arizona. “If I’m in the State of Texas or Arizona, I add another dollar to $1.50 in reduced property taxes,” Spencer said.
10. E-Commerce Will Encourage Brick-And-Mortar Retailers To Consolidate Services
Despite shallow-bay buildings and fulfillment centers growing to accommodate more inventory space across multiple tenants, retailers have also begun to consolidate their services across both brick-and-mortar and online services into one facility. “We are seeing some companies combine their traditional distribution network with their e-fulfillment network,” Armstrong said. “So we definitely have to design projects for this new requirement. We expect to see more traditional brick-and-mortar retailers convert part of their business to e-commerce.”
Remaining on the forefront of Commercial Real Estate trends is a way of business for Ware Malcomb.
The firm is a recognized international expert in industrial design. Ware Malcomb has designed over 1 billion square feet of industrial space in North America. To view our industrial portfolio, please visit our website.