Going Vertical: Modernizing Industrial

by | 16 June 2020

Prior to the precipitous events of COVID-19, we were experiencing significant supply chain shifts across North America in both rural and urban industrial markets. With expectations surrounding the new normal and the rapid uptick pressuring the supply chains, our focus remains committed to meeting the industrial real estate demands of e-commerce. The increasing pace of delivery contributing largely to final-mile distribution will continue to create demand for warehouse and distribution facilities in our tier one cities. Unlike many tertiary markets that have seen over-saturation to accommodate the final-mile logistics, our largest markets and point of entries are having to meet the speed and proximity requirements challenged in highly congested markets for a decentralized network of delivery. The majority of existing warehouse and distribution facilities surrounding our cities are challenged by the lack of capacity and modernization necessary to fulfill the specifications required to meet the business solutions of logistics and distribution occupiers.

The requirement for capacity and modernization of current U.S. industrial inventory in select first tier markets to handle continued growth in e-commerce is presenting vast opportunities for industrial real estate. Industry experts point to the use of multi-story as the norm in key markets in southeast Asia however this is still a novel concept in the U.S. As solutions continue to develop, building heights by going vertical in the U.S. keeps increasing. We have summarized why going vertical and modernizing warehouses and distribution facilities will contribute to meeting occupier demand.

KEY DRIVERS TO GOING VERTICAL AND MODERNIZING IN FIRST TIER MARKETS

  • Shaping the future: Boost in inventories closer to densely populated urban areas as e-commerce grows into same day delivery system as well as hourly delivery model driven by consumer expectations forcing ever-increasing speed to the end user.
  • Speed to market: Hub and spoke distribution expansion; accommodating forward stocking facilities for expeditated deliveries to consumers.
  • Constrained land and assembling sites: Satisfying the need to provide large distribution facilities close to the consumer for final-mile logistics is expected to expand. Urban core areas where land is scarce and costly can benefit by increasing building height in single-story facilities and exploring multi-story development.
  • Height compliments advanced technology:  E-commerce distribution centers are implementing cloud-based management, IOT, smart warehouse technology, robotics, wearables and sensors. Modern day technology contributes significantly to improving efficiencies and ROI. According to Logistics Management, the average clear height of distribution centers was 32.7 feet in 2018, an increase from 31.1 feet in 2016.
  • Investors driving capital: The lack of modernization and resulting CapEx is causing ownership transfer from various legacy owners to investors.  The investors are deploying the necessary capital improvements to conform to current standards. Coming out of 2019, U.S industrial investment is $112 billion — a 14% increase over 2018’s highest annual level since 2001. Availability of low interest rate lending should continue to be favorable.
  • Increased demand capacity: In addition to the rapid growth in e-commerce, the new normal of stockpiling emergency equipment, meeting demands for essential supplies and increases in cold storage requirements are expected to continue post COVID-19. Durable goods are also expected to increase the demands for capacity as consumers shift purchases online.
  • Occupiers inventory expectation: Occupiers are requiring higher quality buildings with modern design and maximizing height. The design and construction of new and existing facilities that offer enhanced features appeal to occupiers and maximizes the value of the property.
  • Prime locations for Class A buildings:  With a shortage of ready to go sites, bringing sites to their highest and best use in first tier markets in prime locations is a major consideration in the operational savings that can be gained by optimal site location.

At Colliers, we are tracking the changes in the supply chain and the direction of growth in e-commerce in order to provide solutions for occupiers in tier one markets challenged by inefficient buildings and availability of prime land for development. The vast opportunities to satisfy the demands of the e-commerce consumer will require embracing flexible industrial warehousing solutions of going vertical, the addition of technological advancements, and exploring novel building design concepts.

About the Authors:

As a Managing Director at Colliers, Robert Lella represents property owners, as well as national and regional occupiers with their acquisition and disposition requirements. Areas of expertise include sales and leasing of warehouse and distribution facilities, as well as professional offices with a distinct focus in the outer boroughs of NY including the Bronx, Westchester and Connecticut. Robert specializes in structuring and negotiating of sale and lease transactions, site selection, repositioning projects, as well as supply chain logistics.

 Head of Location Strategy Consulting, Gregory Healy, a senior vice president, leads the Supply Chain Solutions team in the U.S. for Occupier Services, as well as Workforce (Labor) Analytics Consulting practice. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.