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NAI Global: Industrial Demand Rooted in Long-Term Changes to Distribution, Manufacturing

Olshonsky NAI Industrial

Shifting behaviors and expectations for consumers, manufacturers and distributors have made industrial space central to the commercial real estate landscape. “This is an asset class that for 25 years of my 39 years in the commercial real estate business was a boring, middle-of-the-road class. But this steady investment has just exploded,” says Jay Olshonsky, president and CEO of NAI Global.

Much of the most recent change has been driven by the particulars of the COVID-19 pandemic. Delivery became a way of life for those socially distancing, creating an instant need for more distribution and warehousing centers. Olshonsky explains that the behavioral changes starting in March of 2020 accelerated trends (online shopping, delivery/pickup services and working from home) that might otherwise have taken five or more years to come to fruition.

Olshonsky explains that there are still hurdles for this ascendant product type to overcome, but the changes we’ve seen over the last year will remain.

Industrial Not a Bubble

 “Industrial is here to stay,” says Olshonsky. “COVID accelerated trends that already existed, but those trends were already in motion. We’re seeing some changes that are fundamental.”

The need for delivery and warehouses is fed by new expectations: “Ecommerce is the new retail. New exercise gear or shirts aren’t picked up from a retailer, but the retailer delivers them to you instead. That has become the norm. Now there’s also an expectation that goods and services must be delivered so much faster.”

Manufacturing is making a comeback, due to the need to get goods to market at high speed and a growing dissatisfaction with the supply chain. “Events like the Suez Canal blockage or global slowdowns in logistics are driving an interest in establishing additional supply chain options,” says Olshonsky, a trend that will support a variety of industrial opportunities. “Walmart saying that they’re going to spend $350 billion worth on domestic (or domestically assembled) goods in the future will create more demand for warehouse and manufacturing space.”

With Walmart’s focus on American-made goods and the proposed American Rescue Plan set to focus on infrastructure, Olshonsky foresees a great need for industrial manufacturing (including cement plants and steel mills).

Remaining Logistics Questions

Last-mile distribution, returns and refrigeration are geographically focused problems that still vex the industrial and warehouse industry. The thread that ties these three problems together is deceptively simple: goods in the wrong place or not moving to the right place fast enough.

Reliance on the hub-and-spoke and point-to-point models, using retail stores as distribution points and the creation of more industrial and warehouse space (many with cooling capabilities) offer solutions for these concerns. “You’re going to start seeing the need for those smaller and mid-size warehouses in secondary and tertiary markets, because there’s still a lot of population in those areas, and they still need to get goods and services.”

Distribution Centers Specs

“Distribution centers needs have become standardized: a 32-foot clear height warehouse building that needs a large amount of parking not only for tractor trailers, but also for employees. Because of all this demand, you’re seeing industrial land values double and triple in some cases.”

Buildings today need more amenities. Heating and cooling, parking, nearby bus routes and food services (especially for facilities running 24/7). Port and intermodal logistics are growing in importance every day: “Everybody wants to be to a rail intermodal or close to an existing port, because that’s where the goods and services are coming in. In a lot of cases, you can’t just store goods in a container, but you need to take the container apart, put it in a warehouse and then distribute it from there.”

Specific locations are growing more attractive for manufacturing: South Texas areas near rail lines are prime real estate for auto manufacturers hoping to ship in needed components from Mexico. The Southeast and Southwest (where rail, labor and utilities already exist) is gaining ground for companies hoping to manufacture goods in the face of an unreliable supply chain elsewhere.

Highly automated distribution centers (like those used by Amazon) or manufacturers (including car manufacturers) may spend more money on the inside of the building than the land and the building cost together. But costs are growing across the board. Olshonsky explains, “Steel is a huge component of warehousing and warehouse buildings, plus racking systems for storage and other warehouse and industrial needs.”

The most important factor in these sites remains flexibility. The ability to acquire nearby land if needed or to handle a sudden influx in labor/demand can heavily influence the desirability of a property.

Transport Equation

“Transportation can make up 50 to 60 percent of the total spend for goods and services. There’s some estimates that transportation costs can be 10 to 15 times the cost of real estate,” Olshonsky points out.

New laws and restrictions on driver safety that went into effect in 2020 are creating pricing pressure. So too is the potential proliferation of industrial sites: “Transportation is a separate component that will drive where people have warehouses and how they locate things. In many cases, warehouses need to be closer to each other, creating a need for more warehouses to be built or acquired. Often, they will be smaller, more like 50,000 to 150,000 square feet, compared to a 500,000 to a million-square-foot monster distribution centers.”

Data Centers

Data centers are another field where demand is coming into focus. Demand for cloud warehousing seems endless and is built on an ever-growing need for more storage and processing power. “Data center owners are looking to buy industrial, fully leased parks on large scale, where they can ‘bank’ the land. An investor might obtain a million-square-foot industrial project with some tenants in it currently and the tenant leases expire after a certain amount of time. The investor might write a check for the property, get a return on investment, do all their due diligence (obtain all of their entitlements, make sure utilities needed for data centers are brought to the site, make sure the zoning is already appropriate, etc.) Then they plan to knock the buildings down to build a data center when the time is right.”

The Future of Industrial: Manufacturing, Data Centers and Likely Innovations

The growth of delivery as an expected convenience, plus the need for warehousing, manufacturing and more indicates that the future of industrial is likely to be extremely bright for the next five to six years, according to NAI Global.

Barring a Black Swan event that goes beyond COVID-19, Olshonsky doesn’t see much that could derail the rise of warehouse and industrial space. Certain disruptors (like driverless trucks or innovations in 3D printing and consumer customizations) could come into the market, but they may solve certain problems rather than impeding the growth of the industry.

“Pricing is expensive, but since industrial real estate only makes up perhaps 10 to 15 percent of the total spend, it’s a very good time to be an industrial owner. The biggest players in this space (Amazon, Target, etc.) are doing well. There’s also a ton of institutional capital coming to this space. There has always been institutional capital for the users of buildings, but now you’re starting to see the traditional institutions heavily interested in industrial ownership, industrial development, manufacturing, etc. This is in primary, secondary and tertiary markets, with lots of real estate investment trusts involved,” says Olshonsky.

Content Partners
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Walker & Dunlop

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