The traditional warehouse and distribution center is a wide, squat structure sitting amid seemingly endless tracts of land at or near interstate highways or state roads. Those aren't going away, but a new type of warehouse design is muscling its way in: taller structures with a new focus on three-dimensional (3-D) measurement that captures the true extent of a building's available space.
In a report issued in late March, CBRE Group Inc. said the height of the typical U.S. warehouse had increased to 33 feet in 2016 from 24 feet in the 1960s. What's more, while 13.7 billion cubic feet of U.S. warehouse space was built from 2010 to 2016, that would be just 422.5 million square feet of space if the facilities were measured by ground-floor area. Driving the move upward is the rapid growth of e-commerce fulfillment networks that have led companies to install mezzanine levels to add more human pickers as well as a need to be closer to densely populated urban centers where land is in short supply, prohibitively expensive, or both.
David Egan, CBRE's head of industrial and logistics research for the Americas, recently spoke to Mark B. Solomon, executive editor-news, about the trend to build taller and to measure space through a 3-D prism, and how this evolution in design may spur the next phase of U.S. industrial property's multiyear success story.
Q: Industrial real estate has been on a multiyear tear. How long do you see this continuing?
A: With a growing domestic economy and e-commerce sector, demand in the near term is likely to persist. It should slow a bit from the very strong run it had from 2013-2015, but it still will be at, or above, long-run averages. The supply side, which has been somewhat slow during this cycle, is projected to deliver new product at, or slightly above, the rate of demand for the first time in nearly a decade. This will have the effect of pushing availability rates up a bit and slowing the rate of rental growth. Overall, the market is in a fairly mature state but still looks to be strong in the near term.
Q: What factors would slow the market down?
A: The two factors that would slow the market are a flat or shrinking U.S. GDP, and/or a significant slowdown in trade due to a slowing global economy or political pressures. However, both factors are mitigated to some degree by the continued buildout of the e-commerce supply chain. Both retailers and suppliers need more distribution locations to get as close as possible to the consumer. This growth is not as tied to the vagaries of the economy, and it is very likely to persist regardless of any change in the economy.
Q: The Federal Reserve is considering two, maybe three, more rate hikes in 2017. Will higher borrowing costs, which would increase inventory-carrying costs, inject friction into the industrial market?
A: Higher inventory costs are certainly an issue for supply chain players. However, the Fed's desire to raise rates would be in response to its current and future perceptions of a strong economy. A strong U.S. economy means a strong U.S. consumer who is buying things. The growth in consumption is accretive to the users of supply chain real estate. That should lead to further topline growth and mitigate the higher carrying costs that would come from higher rates.
Q: CBRE recently published a report on warehouse and DC development that predicted the future of building design will be vertical rather than horizontal, making the measurement of cubic feet, or the "third dimension," more important. Can you explain the significance of this design trend, and its impact on warehouse users and operators?
A: Modern fulfillment centers tend to have very large inventory counts and high throughput of small items in contrast to traditional warehouses, which move inventory in large batches on pallets. Modern fulfillment is very labor-intensive, so it is critical to design a warehouse where people can get access to the items in the racks. The most efficient design is to build taller warehouses for more volume, and then construct mezzanine levels on which people can walk and get access to racks 30 feet in the air. A 40-foot warehouse allows for three levels of mezzanine, which is the most efficient and cost-effective use of the entire building.
Q: E-commerce is clearly driving this, but you said the reason behind taller warehouses is that users could install more mezzanine levels to accommodate more pickers, not because it would be a more efficient use of urban space located close to many e-commerce end customers. Given this thinking, is it possible that we will see skyscraper-type warehouses dotting the rural landscapes where the traditional squat warehouses are located?
A: Skyscrapers? No. While the average warehouse height is creeping higher, it's important to note that the e-commerce user and XXL distribution centers still are a minority of the supply and demand in the market. The majority of the users are still somewhat traditional companies who adequately make use of smaller buildings.
Q: Will lower property costs be a side benefit of this trend because there will be less raw land needed?
A: Land requirements for these large buildings are not going down even as the heights go up. These types of facilities require excess land for parking for additional employees, for extra trailer storage, and to accommodate the extra truck traffic. The latter because there are more truck visits to these high-volume fulfillment centers than to regular warehouses. Savings on the costs of land is not really a feature of these buildings thus far.
Q: On another front, users that are being priced out of expensive coastal markets, as well as key inland commerce centers, are looking at less-expensive markets long considered second-tier. Is the country's transport and logistics infrastructure capable of supporting increasing demand in the nation's interior?
A: The inland port infrastructure is solid, but it has room for improvement. We have seen secondary markets such as Kansas City and Greenville/Spartanburg (S.C.) make investments in intermodal infrastructure and capture significant market share. As the major intermodal markets like Chicago and Dallas near capacity constraints, other smaller, yet well-located markets like Columbus, Ohio, have the opportunity to capture outsized growth with investment in inland port infrastructure, such as intermodal facilities and airports.
Q: What is the next frontier for industrial development? Is it geographic? Related to expansion of verticals?
A: The next interesting wave will be the addition of multilevel warehouses in the U.S. These are not warehouses with extra mezzanine levels. Rather, we're talking about cubes stacked on top of each other, where each level can accommodate trucks, and loading and unloading. This has been common for some time in dense Asian and European cities, and it will be necessary in dense, infill, land-constrained areas in the U.S. We are seeing the first wave of this in certain West Coast markets. We should see it rolling out more broadly in the next several years.