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Cushman & Wakefield’s John Morris talks industrial trends and forecasts at I.CON ’16

NAIOP-ICON-2016
ohn Morris of Cushman & Wakefield, Chris Caton of Prologis and NAIOP NJ President Clark Machemer discussed trends affecting the current industrial real estate cycle at I.CON Industrial Real Estate Trends & Forecasts.

More than 600 real estate professionals from across the country attended I.CON ’16: Trends and Forecasts, the annual industrial real estate summit produced by NAIOP, the Commercial Real Estate Development Association.

More than 600 real estate professionals from across the country attended I.CON ’16: Trends and Forecasts, the annual industrial real estate summit produced by NAIOP, the Commercial Real Estate Development Association.

The message emerging from the event was clear: Industrial real estate is flexing its muscles, driven by rapid changes in the logistics sector. Changes in how people live, shop and buy, and in e-commerce in particular, are behind the surge.

“The signs are hard to miss,” John Morris, Cushman & Wakefield’s Chicago-based executive managing director and industrial services lead for the Americas, said in a session titled “Comparing the Cycles.”

The current national vacancy rate of 6.1 percent, according to Cushman & Wakefield research, “is at a 30-year low and 220 basis points under the 10-year historical average,” he said.

“E-commerce is very clearly a leading factor,” Morris told attendees, noting that it has driven 45 percent of all big-box industrial absorption in the last year. Other statistics he cited include that, in the first quarter of 2016, speculative projects accounted for almost 110 million square feet, or nearly two-thirds of the total new construction.

On the other hand, while that number is robust, “The signs are there that development is under control,” he added. “For example, the gap between speculative and build-to-suit construction is much less than it was in 2007, when spec projects accounted for more than 80 percent of the total. And the volume of new product that has come on-line since 2010, approximately 566 million square feet, is 27 percent less than the total from 2004 to 2009.”

Fellow panelist Chris Caton of Prologis noted that 2015’s 175 million square feet of new space amounted to only about 1.3 percent of existing stock, a smaller share than any other period in the past 15 years. The discussion was moderated by Clark Machemer, senior vice president, The Rockefeller Group.

The trends within the e-commerce-driven logistics sector are being shaped by, “changing customer demands—seamless, predictable and consistent service levels across all channels,” Ben Conwell, Cushman & Wakefield’s Seattle-based senior managing director and e-Commerce and electronic fulfillment practice leader, shared. The causes include radically disrupted inventory planning demands, he said, addressing a discussion on “E-commerce Last Mile.”

“The keys to meeting this demand include understanding and utilizing the right technologies; finding the right logistics partners; and understanding the balance between delivery capacity, speed and cost,” he said.

In that regard, the leading physical retailers are focusing on leveraging their stores’ footprints, what Conwell termed “the anti-Amazon. Walmart, BestBuy, CVS, Target, Nordstrom and other ‘traditional’ retailers are expanding their investment in alternative service models.”

Hence, there’s a need for more industrial space to accommodate these requirements. Among the types of facilities that have emerged, according to Conwell: smaller distribution centers, 300,000-500,000 square feet for next day delivery; large fulfillment centers of 1 million square feet-plus, for two-day and longer delivery; Amazon’s 200,000- to 600,000-square-foot sortation centers, facilitating among other benefits, direct injection into the USPS; and 10,000- to 70,000-square-foot “last mile” terminals for delivery “in as little as just a few hours. Last mile innovation is white hot,” Conwell said.

And while select larger retailers can handle such delivery in certain markets, “most have to hire it out to 3PLs,” Conwell noted. “Fulfillment and last mile are too capital intensive for everyone to have their own. They have to invest in reinventing their networks and buildings toward omni-channel.”

The discussion was moderated by Curtis Spencer, president of IMS Worldwide, and included Kelly Picard, CEO of Hackbarth Delivery Service. And the concluding message, in Conwell’s words, was that the impact of the current trends in industrial real estate “is only the biggest disruption since just about ever.”