How Robots Will Revolutionize Industrial
E-commerce, omni-channel deployments, and same-day delivery blur the line between industrial and retail, and Amazon said it will skyrocket from 1,300 robots to 10,000 in its warehouses this year. (Soon, we'll be delivering Amazon goods to the robots.) Our Chicago Industrial Real Estate Summit last week felt more like an Arthur C. Clarke novel.
More than 325 of you joined us at the Hyatt Regency O’Hare in Rosemont, where Newmark Grubb Knight Frank executive managing director and 2016 SIOR prez Geoff Kasselman gave opening remarks. People have more computing power in their hands than on any Apollo mission to the moon (though we don't get to wear those cool helmets so it's a bit of a trade off), and more machines are connected to the Internet than we are, Geoff tells us. Thanks to big data, we're headed toward Moneyball for buildings, he says, with industrial Sabermetrics and custom algorithms that will dictate an asset's life cycle and chances of profitability.
The local industrial market has seen 16 consecutive quarters of positive net absorption, and 27 new construction projects are slated for delivery this year, Geoff (left, with noted futurist Ray Kurzweil) says. But in a business that’s long on resilience and short on memory, it’s important to keep a watchful eye for signs of market frothiness. Watch for shortages of construction materials, mini rent slumps in certain submarkets where several new spec facilities come online later this year, status updates on the state’s business climate (we have the fourth highest corporate tax rate in the US), and potential commoditized pricing given the little differentiation in new spec product, Geoff says. Could delivery timing be a building’s most important asset?
Cushman & Wakefield executive director Jim Carpenter moderated our acquisitions and dealmaking panel, roving around the room. While it’s difficult to quantify a change in net aggregate industrial demand due to e-commerce, its effects are evident when you walk today’s buildings. Where you once saw two guys with a forklift loading pallets into a truck (or more likely two guys on a coffee break next to a forklift), today an 80k SF building could be doing e-fulfillment for a small jet ski and motorcycle parts website, like Jim just saw at an Indiana property (conveniently located halfway between the airport and UPS). Jim also asked panelists about industrial spreads between A and B properties and who’s renting second gen buildings.
Head of JLL’s Chicago industrial group, Trevor Ragsdale says only a few of the top supply chain pros have gotten ahead of the same-day delivery curve, finding access to both cheap labor and the necessary logistics (freight, ground, etc.). As goods work their way to the consumer, omni-channel fulfillment could mean anything from picking up in-store to a van loading up out back and heading for your driveway. (Can you believe this much thought goes into getting you an Operation Dumbo Drop DVD?) Our same-day expectations will help revitalize infill markets, and the need for stellar locations at a low cost means companies will find a way to use functional B and C industrial product, he says.
Merit Partners partner Aaron Paris is proud owner and redeveloper of the former Marshall Field’s warehouse. Industrial investors shouldn’t fixate on compressed cap rates, but rather if you can develop at least 250 bps over your exit cap rate (any lower is a tremendous risk), he says. It’s difficult to say who is the best industrial tenant given technology’s exponential advances (Borders used to be at the top of everyone’s list, now they're a ghost story), but you’ll always have demand for B product from industrial tenants displaced by gentrification. He’s banking on those former West Loop tenants, especially from the food industry, to look at the Marshall Field’s site as an alternative.
Through the acquisition, development, and redevelopment of high-quality distribution warehouses, $3.5B First Industrial Realty Trust (66M SF owned, managed, and developed) is focused on cultivating sustainable long-term cash flow growth for investors, CIO Jojo Yap (left) says. Four key things affect your yield over time: rent growth, downtime, tenant improvements, and leasing commissions. As long-term investors, cap rates should just be a barometer when evaluating deals, he says. While large companies’ balance sheets weathered the recession even with expensive supply chain reconfigurations, Jojo’s just now seeing that activity trickle down to mid-size firms, resulting in increased rents and absorption across the broad spectrum of industrial properties.
CenterPoint Properties CIO Jim Clewlow (right) says his firm looks at the logistical benefits of every property in its portfolio, and the right industrial location completely depends on your perspective and what the logistics of your operation demand. A company prioritizing access to labor wouldn’t locate in Joliet, for example, but one that is shipping out 100,000 containers/year like Walmart would save hugely (nearly one year of rent) with the proximity to intermodal. On the same-day delivery trend, Jim is waiting for the other shoe to drop as more players scramble for a piece of the pie (like FedEx and UPS upcharging for the service).
Podolsky | Circle Commercial Real Estate Advisors managing principal Randy Podolsky was the winner of our early morning Hawks trivia (we’re holding back tears after last night), snapped with his prize hockey puck provided by Ledcor Construction, above.
Here's Randy at the game last night with Colliers' Lynn Reich. A niche player in industrial development, Podolsky is focused on building 50k SF to 80k SF product in markets where nobody else wants to be. Banks are throwing money at existing industrial assets these days, he says. (Think 10-year, no recourse, affordable rates, no pre-payment penalties.) And they’ll even support spec projects, which means developers don’t have to go to the life companies, Randy says.
Special props to our sponsor Qube Global Software, which knew the way to a summit attendee's heart is clearly Legos. Qube's corporate real estate and property management software is used around the globe by commercial real estate giants, and we were smitten with VP of business development Matthew Sheldrick's British accent and jokes about elevators. Learn more about Qube here and stay tuned for continued event coverage tomorrow!