Industrial insider: Top trends for industrial real estate in 2017

Elise Couston

By Elise Couston
Senior managing director, Newmark Grubb Knight Frank

As the e-commerce sector continues to experience growth in market share, and as new trends in manufacturing transform and grow, developers are paying close attention to what users will require going forward so that industrial real estate can accommodate their changing requirements and provide the required flexibility as business models evolve.

We have identified several current “Top Trends” which are described below, and currently on top-of-mind for most real estate decision-makers.

Location first

Location has always been one of the foundations of real estate decision-making, and continues to be one of the most important factors that drive decisions.

Adequate labor supply has become a key issue for growing companies in the e-commerce and manufacturing sectors. Being well-located in a growing demographic, with access to public transportation, is becoming more critical than ever.  In many cases, companies are competing for employees within certain labor markets, so proximity to an ample and expanding labor supply has become a central factor in determining a company’s location.

Quick access to highways and arterial roadway networks is also important and has become more beneficial to employees and employers that serve customers with distribution requirements.

Access to intermodal facilities and ports, on the coasts and inland, with rail connectivity to other major cities, are also important locational traits that are being valued by companies going forward.  Research indicates that there has been a recent increase in intermodal shipping, particularly with freight train deliveries.

Growth of e-commerce

Perhaps the hottest trend continues to be the exponential growth of e-commerce and the impact it is having on so many aspects of our everyday lives.

A growing expectation by consumers for the delivery of online orders within a short amount of time has also created the need for multiple “last mile” facilities in major market areas.

For industrial buildings, the demand for large regional distribution facilities with sophisticated warehouse management systems has been increasing over the last few years, and that trend is expected to continue.

E-commerce has also continued to significantly impact the growth of intermodal facilities across the country. Several research reports indicate that there has been an increase in rail usage, and imports into the ports has also been increasing.

Another recent and popular industry trend includes a new type of multi-tenant industrial building, the “shallow-bay building”. These buildings are utilized as fulfillment centers for the “last-mile” delivery of e-commerce products to the consumer. These facilities are much closer in proximity to the end user, and require additional parking for a higher employee count.  Products move through these facilities in one or two days, so the narrow-bay configuration facilitates the functionality of “turning” the product around more quickly.

Ceiling heights matter

There are more companies than ever who are using modern and sophisticated warehouse management systems (WMS) that are designed to maximize the efficiencies of 30’ to 36’ clear ceiling heights. Some users are doing build-to-suits at 40’ clear, but this warehouse ceiling height requires upgraded sprinklers, thicker floors, and different racking and fork-lift vehicles to function at this height.

The higher ceiling height in warehouse facilities is also being driven by a scarcity of land in the most desirable locations.  This is driving land prices higher, which in turn impacts higher project costs and rents.

Second generation facilities with warehouse clear heights that are below 20’ are being redeveloped into a new, higher-clearance building in high-demand locations.  This trend is expected to continue as land continues to be scarce in these areas.

Increased security

Maintaining the safety and security of inventory and employees has now become a top priority for almost every company, from manufacturers and suppliers to logistics companies and their customers.

Information Technology (IT) has become an integral and valuable part of the supply chain and is protected through various measures. Companies have become very serious about information security, and now implement multi-level initiatives to maintain their information at the highest levels. Backup servers in offsite locations provide storage in external areas, keeping information safe and readily accessible at any time. Messages are now encrypted to ensure delivery is secure both into storage or while being accessed by authorized users.

Quality procedures, security measures and certifications are continuing to improve in an effort to ensure that products reach the correct destination as often as possible.

The ability to follow and track products all the way through the supply chain is an extremely effective way to enhance logistics security. Products can be tracked by the entire truckload, specific pallet or even by the single item. Tracking products from beginning to end provides transparency for suppliers, manufacturers, 3PLs and customers.

The securitization of industrial properties that move products through the supply chain has also become more commonplace.  Multiple methods of securitizing a property including fencing, guard house, and key card entries, are now a requirement by most companies to ensure protection for their employees and the products they handle.

Property prices and lease rates on the rise

With vacancy rates at very low levels, an increase in spec building development has attempted to keep up with increased user demand in many of the most desirable locations.

Construction cost increases, coupled with escalated land prices, have driven overall project costs up in the last few years. The result is higher rental rates for new buildings as well as second generation facilities.

National rental rates are anticipated to appreciate at an annual average rate of approximately 2-2.5% over the next few years. In some of the major manufacturing hubs, such as Chicago, there have been recent year-over-year rental increases of 6%.

Interest rates and cap rates are still at very low levels, with investors facing fierce competition for purchasing class A and value-add properties in core markets. The growth in lease rates, together with low vacancy rates, is continuing to fuel new spec buildings in the most active markets. This trend is expected to continue at least through 2018.

The good news is that commercial real estate is likely continue to flourish throughout 2017-18, and the current trends will favorably address the ongoing demand for maximizing operational efficiencies.

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