Warehouse Sector Reaches New Heights as User Demand for Flexibility, Variation Increases
By Nazir Khalfe, Principal, Powers Brown Architecture
Having designed multiple millions of square feet of speculative and build-to-suit industrial buildings in my career, I’ve witnessed some striking trends over the past two decades, especially with the advancements made in tilt-wall construction.
The ability to go higher and store and ship more product with today’s technology is creating an ever-changing landscape for industrial product. We have witnessed the boom of e-commerce, advancements in logistics and automation, and all the while tried to keep up with the dynamic market forces that produce a successful industrial park.
Since the Great Recession, demand for industrial space has been at a premium, not only in Texas but also in most markets throughout the United States. Out of necessity for how our lives are changing, the industrial market has become the darling of the real estate industry. In 2020, thanks to the exponential growth of e-commerce activity and manufacturing jobs, we are breaking new ground on how a standard industrial park looks, feels and operates.
While COVID-19 has not changed the expansive, open-space feel of warehouses where social distancing is inherently built-in, the pandemic has started to impact the industrial world on the development side.
Developers and REITs are starting to see better returns on investment, as well as additional opportunities to expand their holdings. These opportunities came about as supply chain disruption during the first few weeks and months of the stay-at-home orders identified a weakness in the ability to keep necessary goods stocked for mass distribution.
With that need in mind, we are not only seeing greater demand for speculative space across the nation, but more requirements for flexibility and for variation within those spaces.
Evolution of Design
Massive industrial parks that were originally set up to maximize coverage now are becoming more strategic. The introduction of local retail distributors and competition from infill industrial has allowed architects to start looking at large-scale parks from less of a site coverage perspective to more of a marketability standpoint. Variation in designs of buildings with multiple depths helps developers capture the interest of both local and national tenants.
Ultimately the goal of an industrial park is to deliver the proper volume of space to serve the designated demographic. Due to the ever-escalating cost of land, developers are increasingly required to go to greater heights with new projects.
Twenty years ago, a speculative industrial facility in an outlying market would have been designed with 24- or 28-foot clearance. In recent years, and going forward, we have and will continue to see the height limits of these structures expand, with users now requiring clear heights in the 36- to 40-foot range.
In the case of Amazon’s large distribution facilities, that elevation is being pushed even further. This new height requirement is a direct result of the need to store and distribute more goods, as well as to maintain functionality with automated storage and racking systems and heavy-duty equipment. Striking the proper balance in the speculative market is, as always, taking center stage.
The initial cost must be verified against a well-conceived exit strategy. As we see across Texas and the nation, these facilities tend to lease up very quickly. Overbuilding to accommodate every variable could lead to vacancy issues down the road.
Furthermore, the industry is seeing improvements in slab construction and durability, along with the advancement in the required fire suppression systems for these tall structures. These features, once typically viewed as build-to-suit luxury items, are now making their way into the speculative market. This too is a direct result of developers needing to market to a wider range of users.
New tenant requirements for security and frontage are forcing developers to structure their industrial parks in ways that allow individual buildings to be separated from the group as standalone facilities.
As such, access and security are becoming even more scrutinized in design plans as requirements change. Building in multiple access points and maintaining separation between truck and pedestrian traffic flow is a bigger concern now more than ever. And as automation starts to take over the truck court, this separation will become a hard-and-fast requirement.
All of these changes in industrial design present new and interesting challenges for developers.
Not only do developers need to appeal to a greater number of users in the market with diverse offerings, but they must also maintain strong exit strategies. In many markets, escalation is making it harder for developers to hit the rental rates needed on the smaller front-load and rear-load buildings.
As developers diversify their building types, the one equalizer is the cross-dock facility. Projects are being built in phases, and we are seeing large cross-dock facilities being constructed along with smaller
front-load and rear-load neighbors in an effort to maintain some control over the initial cost.
The cross-dock facility has always been and will continue to be the gold standard for logistical and distribution needs. The nature of the cross-dock — with distribution accommodated on both sides of the building — allows for maximum flexibility in terms of tenant makeup and operational clearances. For this reason, the configuration appeals to both developers and e-commerce users.
Numerous studies have predicted that e-commerce will continue to capture more and more of the national retail market as people get more comfortable ordering items from home and waiting a day or two for delivery. COVID-19 will only accelerate this trend.
Currently, the United States averages roughly 24 square feet of built retail space per person — by far the most of any developed country in the world. As a comparison, the United Kingdom has roughly four square feet per person. Our clients are predicting that as e-commerce starts to capture more market share, demand for industrial space will grow along with it.
As far back as the early 1940s, industrial users have taken advantage of automation in one form or another. As the role e-commerce plays in everyday lives continues to increase, automation will continue to improve, sortation and fulfillment methods will advance and trip times will
Going forward, we will start to see changes with regard to the structures themselves as well as to the sites and amenities needed to maintain a good market option. We are predicting that automation outside the structure and within the truck court will start to change the all-too-familiar metrics of a successful industrial park.
Automation with regard to trailer maneuverability could reduce the overall depth needed for proper and safe traffic patterns within the site. These advancements could also lead to the increased utility of the standard dock position, as well as increasing the number of dock positions. Understanding how these new features will affect the design of industrial buildings of the future is something we are tracking aggressively.
The industrial market is on the verge of becoming more than just a space for boxes. It has now become an essential service and supports the health and well-being of our cities and rural areas alike. It’s the great equalizer in the real estate market, and we expect to see significant growth in the product type in the coming years.
Nazir Khalfe, AIA, RIBA, RID, a principal with Powers Brown Architecture, began his career as a project manager in the Houston, Austin, San Antonio, Denver and Washington, D.C., markets. Based in Houston, Khalfe has designed and documented leading industrial projects, office master-planned, speculative and corporate office buildings, and distribution, assembly and manufacturing facilities throughout the United States and Canada. This article first appeared in the July 2020 issue of Texas Real Estate Business magazine.