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Innovation, technology to drive the future of industrial CRE

In the late 1800s, people commuted by horse carriages and streetcars. Transportation of goods was...

In the late 1800s, people commuted by horse carriages and streetcars. Transportation of goods was expensive and cities and industrial facilities grew next to ports and railway lines. All that was about to change.

The invention of the automobile redefined real estate. Cars and trucks allowed for more efficient, timely and cheaper transportation of goods. Manufacturers built their industrial facilities on land farther away from the downtown core.

With the Model T, Henry Ford changed the face of city centres. That was over 100 years ago!

On June 29th, 1956, U.S. President Dwight D. Eisenhower signed the National Interstate and Defense Highways Act into law. The construction of 41,000 miles of interstate highways pushed industrial out further. Suburban life with a white picket fence became a symbol of the American Dream.

Can we expect a similar disruption linked to vehicles in this century?

The rise of industrial real estate

News stories about the industrial sector say that it’s now a favourite asset class. However, this popularity has long been present, and it didn’t arise only due to the pandemic.

Yes, e-commerce disrupted retail. And industrial facilities became even more important. The current pandemic has simply accelerated this trend.

According to the Global Investor Intentions Survey 2021 by CBRE, institutional investors have favoured industrial as the most important asset class since around 2017-’18. It is hard to argue with global trends!

The question isn’t which asset class will perform well in the next two or three years. The better question is – what long-term trends should we follow for the next five to 10 years? And what can we learn from the past?

Industrial as a safe haven?

Some investors see the industrial market as a “safe haven.” This means performing well in times of economic uncertainty.

Why? Because the industrial market has benefitted from more than e-commerce:

– Automation in factories and fulfillment centres is making industrial real estate more valuable. Automation has become essential in improving efficiency and reducing labour costs. Higher efficiency means the operator can afford to pay higher lease rates on a per-square-foot basis.

– Repurposing. Institutional capital is seeking opportunities outside of the residential and office real estate markets. Such capital pays a lower cap rate when the risk of losing a tenant and the cost of finding a new tenant is low. Repurposing becomes important. Unlike factories, repurposing light industrial space is not expensive. When a tenant moves out, such property usually needs minor changes before the next tenant can move in.

– Part of de-globalization includes shifting some goods production from overseas to local factories. This is yet another reason why the demand for industrial property has been so strong.

Before 2017-’18, office space was favoured by institutions. Offices were once a near guarantee for constant income and premium cap rates. Tenants had strong balance sheets and signed long leases.

And the space was re-configurable at a minimal cost.

What changed?

Companies like Lyft appear to compete on how much they can lose before going public. Corporate profits are no longer as certain. Co-working spaces are also disrupting how we work – and will likely continue to do so.

The most recent trend is hybrid work. Some time spent working at the office and some working from home is furthering the uncertainty.

Industrial seems to be a good answer for institutions.

Retail is more industrial and industrial is more retail

There are many types of industrial properties: land, built-to-suit warehouses, flex spaces, heavy manufacturing, cold storage facilities, data centres, showrooms, light manufacturing businesses. The majority of today’s businesses are less “industrial” than they used to be and there is less heavy manufacturing.

Traditional retail and industrial practices have begun to merge. Now retail is more industrial and industrial is more retail.

Let me explain.

E-commerce is retail, but uses industrial space for storage and fulfilment. Innovative retailers with a physical location now sell online. This requires using more industrial space for retail.

But, light industrial has the flavour of “retail.” Long gone are the days of grey-on-grey concrete small-bay strata.

Some industrial buildings look amazing inside and outside. Some showrooms are so well designed you could be fooled into thinking you are visiting a retailer.

They are not “retail” as far as selling goods from their location, but the line between the two is blurred when you add online ordering.

We live in amazing times.

It is difficult to predict what industrial real estate will look like in 50, 20 or even five years. Industrial real estate hasn’t changed all that much from an autocentric perspective. And industrial parks with access to railroads still exist.

But, the world has changed so much in the past 50 years – will it change even more, or less, in the next 20?

So, what’s next?

Is there anything that could disrupt the success of the industrial market? Can industrial ever face similar problems as retail properties now do?

Any action that could solve the scarce land problem will disrupt the industrial market. In B.C., for example, the Agricultural Land Reserve (“ALR”) could release some land for general use. This is unlikely.

Vertical industrial closer to city core would add inventory, but it is expensive to build. Automation and small-scale robotics could further optimize local shopping and last-mile distribution.

Think a local grocery store with a 1/3 traditional and 2/3 automated “warehouse” box model. Orders are fulfilled by automated robots or you can walk the aisles.

E-commerce and personal tech will rally on. The industrial sector will continue migration to more affordable locations farther from the core. But there is a catch – both trucks and employees must be able to get there. Otherwise, businesses cannot operate.

This is where the next automotive invention comes into the picture – self-driving cars.

What will happen to industrial real estate when trucks become self-driving? The future is not all that different from the past. The invention of the automobile led to a disruption of many things, including real estate. The next automobile invention will likely do so again in the near future.

Industrial real estate appears to be a good option for now. But, let’s keep an eye on the future trends and technology that are reshaping our world.

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