Change is everywhere in industrial real estate

The rise of logistics

When NAI Hiffman Executive Vice President Adam Roth started working in industrial real estate 12 years ago, one of the biggest factors tenants considered was the cost and location of the land and buildings. But as costs of everything from fuel to taxes to transportation have changed, the actual real estate cost has become less of a factor.

"Corporations are now looking holistically at their supply chain and how to compete in an omnichannel environment while optimizing speed and cost. Not too long ago, the next interchange would be the location of choice due to a reduced land price and incentives followed by constructing the largest building the site could hold. Now there is a divergent approach with Tenants moving back into population centers for their e-commerce component while having separate operation with an intermodal component for multistate receiving and replenishment. In addition, flexibility has become more of a factor and maximizing the building footprint is not as ideal. More tenants require trailer parking, car parking or the ability for future expansion," Roth says. "The biggest change to me is that the consumer itself is not only forcing changes to the supply chain but requiring these changes to happen at a very fast pace. The consumer has a high expectation level which requires a sophisticated supply chain. Within the overall calculation, the impact of the actual real estate costs will continue to diminish."

Over the last decade, Wal-Mart was going to take over all retail, now Amazon is the main conversation; within two years it will be Alibaba, within four years a company we don't yet know today. Roth anticipates more technology, more specialized and smaller facilities on top of population centers. In addition, a great increase in direct to consumer shipping and mixing centers that consolidate and deliver to your home. There will also be advancements in temperature control facilities and in the overall grocery delivery model.

Roth anticipates that the next revolution in the supply chain will be driverless trucks. By eliminating the cost of labor for truck drivers and being able to work around rules dictating how far and how many hours employees can drive, companies will be able to move their goods 24/7. However, there is a bigger revolution upon us.

"In a recent meeting, a corporation told me one of their machines broke down. The required part would cost $80 and two weeks to receive. Their 3-D printer created the needed part within one day for $. 40" Roth says. "3-D printing will have a tremendous impact on the global supply chain and will be the biggest disrupter this industry has ever seen."

While tenants are trying to figure out the best location, price and amenities for their buildings, brokers, contractors, and architects are trying to find the best technologies to help tenants achieve their goals. Transwestern Executive Vice President John Coleman recently worked with his company to host a Hack-a-thon, a daylong event where programmers and other tech-savvy individuals come together to solve a specific set of challenges. The event focused on issues in the real estate industry, and Coleman was thrilled to see solutions come out of the challenges.

For the architecture challenge, programmers created software that projects a 3-D image of a model from a mobile device onto a background. The software can be used in a conference room or out on a job site, giving developers and potential tenants an idea of what a building might look like long before it's built.

The hackers solved problems with construction estimating by creating a tool that builds a cost estimate based on a customer's emotional response to different building materials. By judging what kind of reaction a potential tenant has to each material, contractors can make an estimate based on ideal materials, then adjust that estimate to fit within the budget based on the priority a tenant places on each product.

For the brokers, the technology experts created a reverse auction platform that allows tenants to tell potential landlords the location, size and type of space they are looking for. Then, the landlords are allotted a specific window during which they can propose their space, including its rent, any tenant improvement allowances and other amenities the tenants might be looking for. This reduces the tenant's need look at spaces and gives landlords a chance to offer their best price in a timely way.

As for technologies in place today, Coleman says that building materials like titanium are allowing buildings to be taller in order to store more goods. Refrigeration technology will soon allow food to be transported via intermodal transit, allowing more convenient delivery for refrigerated building operators.

Efficiency from 3PLs

As retailers move toward a direct-delivery model, they're often looking to third-party logistics companies to create efficiencies. These companies, which offer supply chain services for companies that want to focus on other parts of their business, are becoming a big player in the Chicago industrial markets, often taking up large spaces in the I-80 submarket as well as the I-55 submarket south of I-80.

"3PLs are looking to combine multiple customers into one building, so they need a building that is large, but also one that's efficient," says Lynn Reich, executive vice president with Colliers International. "They don't want to have truck drivers sitting around waiting for their trailers to be loaded."

Because of new hours of service rules, drivers are often only allowed to sit in their trucks for a certain number of hours, whether they are driving or not. So 3PLs want to make sure that drivers are directed to the right dock or door immediately upon entering the premises, and that the truck is loaded quickly so another driver isn't waiting to use the door. Newer regional distribution centers often have dozens of docks and a large trailer court.

"Developers can increase the demand for their product, hence return on investment, by having a high dock-door ratio, plenty of trailer storage, and a high-level of security with a single point of entry for their tenants," Reich says.

In addition to 3PLs, tenants like Amazon that need a lot of warehouses are seeking out spaces in Joliet, Romeoville, Minooka and Elwood. The other area attracting large tenants has been I-57 with its attractive TIF designations providing real estate tax rebate programs. These areas offer the large footprints that 3PLs and large distributors need. As these tenants look to create efficiencies, they're also looking to build up.

"Existing buildings in the city or in Cook County were built years ago when the size and amenities were not part of the specifications. They just aren't going to have the ability to meet the distribution needs demanded by the larger users," Reich says.