The Logistics Matters podcast: Melinda McLaughlin of Prologis on the industrial real estate market | Season 2 Episode 4

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Transcript

About this week's guest

Melinda McLaughlin is vice president, global head of research, for Prologis. In addition to leading the global research team, she focuses on tracking, analyzing and forecasting logistics real estate fundamentals and structural industry trends, and translating insights into strategic decision-making for the company. Her other areas of specialization include supply chain reconfiguration, location differentiation and econometric modeling.

Prior to joining Prologis in March 2015, Ms. McLaughlin was a vice president at Rosen Consulting Group, a boutique firm that provides economic, housing and commercial real estate strategic consulting services to a diverse roster of clients. Ms. McLaughlin holds a Bachelor of Science in economics from the Wharton School at the University of Pennsylvania with a concentration in real estate. She is a member of the Urban Land Institute.

David Maloney, Editorial Director, DC Velocity   00:01

Capacity in the industrial real estate market remains tight. Walmart is betting big on in-store micro-fulfillment. And why is there a big demand for goods-to-person technologies? 

Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast.

Hi, I'm Dave Maloney. I'm the editorial director at DC Velocity. Welcome.

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As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be along to provide their insight into the top stories of this week. But to begin today: Real estate capacity for warehousing seems to be very tight. What's the outlook for industrial real estate for this year and beyond? To answer that question, here's Victoria with today's guest.

Victoria. 

Victoria Kickham, Senior Editor, DC Velocity   01:22

Thanks, Dave. Yes, today our guest is Melinda McLaughlin, vice president, global head of research, for industrial real estate firm Prologis. She's here to talk with us today about trends in warehousing and industrial real estate. Welcome, Melinda.

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  01:35

Thanks, Victoria. Pleased to be here.

Victoria Kickham, Senior Editor, DC Velocity   01:37

Great. Well, I'll just jump right into it. Warehouse and distribution center capacity remains tight as 2021 gets underway. Would you say there's a shortage of space? Or how do you expect the situation to play out this year?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  01:49

Great question. In many locations, absolutely, there is a shortage of space. Throughout the U.S., the vacancy rate is about 4.8%, which is near its historic low. This has barely moved during the pandemic, even as a good amount of new logistics supply has come online. And as far as going forward, you know, this has already begun to play out in the market. Competition for limited availability has definitely increased. And, [in] addition to the surge in leasing, we saw during 4Q, we're seeing a rise in build-to-suit projects—so, for specific customers—and strongly preleasing in the construction pipeline. So, speaking specifically to the shortage, the pandemic-related pause on construction activity we had last spring is going to produce really critical shortages in many of the top logistics markets, during the first half of this year especially.

Victoria Kickham, Senior Editor, DC Velocity   02:42

Wow, thank you. How does that affect the cost of space? What are you seeing there?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  02:46

So, we did see rents rise through year end in most markets across the U.S. In total, they grew by 3.2% in 2020. In turn, this has attracted capital. Developers are bidding up land costs, and so replacement costs are really rising. That'll get carried into future rents, along with this heightened competition. So we expect about 5% rent growth in 2021. So, accelerating relative to last year.

Victoria Kickham, Senior Editor, DC Velocity   03:12

Wow. Okay. There's a lot of—along with that, there's a lot of talk about converting of available real estate, I'm sorry, retail space into warehousing and logistics facilities. Is this is beginning to happen? Is that what you—are you seeing any of that?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  03:26

Yes. So, in total retail conversions really represent—even potential retail conversions—represent a very small portion of the market. We've looked into this in a couple papers, and we estimate that retail conversions could total 5 to 10 million square feet of new logistics supply in the U.S., per year, over the next several years. That really equates to less than 3% of a typical year of logistics supply. So, while there are some examples of successful conversions, as we note in our paper, it's not only tough to find a distressed retail location and space that then works well for logistics, but incredibly complicated to get alignment from all of the stakeholders.

Victoria Kickham, Senior Editor, DC Velocity   04:08

Great. So, we may be hearing more talk about this than is actually happening, because I agree those challenges are many.

What features are logistics customers looking for when it comes to industrial or warehouse space? And particularly, I was wondering what role does technology and automation play?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  04:28

Well, you know, technology is definitely the future, and something to think about, but for logistics—and maybe this helps also illuminate why many retail spaces don't work for this use—it'll depend on the function within the supply chain and the user—but there are a few broad trends.

So, location is really the top concern, especially for last-touch delivery, so that growing e-commerce and e-fulfillment sector.

But if we're speaking solely about building features, there are some general patterns, which include lower coverage—so less building relative to the land, and especially the parking; higher clear heights that can accommodate some of these automation technologies; and, you know, across-the-board access to power.

On automation, we actually released a few reports recently, and with the exception of some of the most highly specialized equipment, we found that automation adoption was rising as technologies were getting more flexible and modular. So that really reduces the need to seek out a very specific type of building or specific building features, because you can move this technology within the facility that you already have.

Victoria Kickham, Senior Editor, DC Velocity   05:37

Great, thank you.

I want to ask about the surge in e-commerce and the need to focus on last-mile delivery. What trends are you seeing in overall demand for space in that regard? And when it comes to location—you mentioned location a minute ago, but—how is how is this affecting the market?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  05:54

Yes, so I mean, I don't think it's news that e-commerce has been growing rapidly, especially this year, or 2020. And this focus on faster delivery times has really played into location selection, and locations that are closer to the end consumer remain in high demand, and we see even more urgency on this trend going forward. But I would say, even for brick-and-mortar retail operations, a focus on rapid replenishment is pulling distribution facilities closer to dense urban and suburban environments, too. So, it's really about—all about proximity to the end consumer.

Victoria Kickham, Senior Editor, DC Velocity   06:31

Prologis recently completed some research on the environmental benefits of e-commerce compared to traditional brick-and-mortar stores. I was wondering if you could give us a snapshot of what you learned, and what it reveals about today's warehousing and logistics space?

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  06:45

Well, I think it reveals a lot about today's warehousing logistics space, but also about the future of where this industry is going. Sustainability is absolutely going to be a cornerstone of that future. Now, on the study, specifically, MIT actually did the research, but my team highlighted some of the specific implications for logistics real estate, and for our customers.

So ultimately, what MIT found was that, on average, e-commerce led to 36% fewer carbon emissions per package relative to brick-and-mortar shopping. And that was mostly due to more efficient transportation routing, where a single delivery van can replace 100 shopping trips or more. And that's great, of course, because e-commerce is definitely not going away. 

Now, focusing only on logistics real estate, they did model a few specific scenarios that have big implications for our industry. The one I think is most powerful is the inclusion of an urban fulfillment center for last-touch delivery, with packages that come from within a city's borders to consumer doorsteps, rather than from the outskirts in. Now, the inclusion of this type of a fulfillment facility reduced transportation-related emissions by up to half. And that translated to 10%, fewer emissions per package. And this is really because you keep the economies of scale by having packages on a much larger truck until you get much closer to its final destination. So, those delivery vans that we all see have to travel a much shorter distance relative to coming from outside in, and that reduces not only emissions, but cost and congestion. So, that was one of those takeaways that we found was really powerful, logistics real estate. 

Additional innovations out there that can help with this balance—again, because we definitely see e-commerce taking hold and growing more going forward—are electrification of the vehicle fleet, which can reduce transportation emissions even more; and innovations and packing, data, and analytics. You know, there's a lot of innovation happening in the supply chain right now, and so it's great to see it from a logistics real estate provider's perspective, and be alongside customers as you're trying to put this into action.

Victoria Kickham, Senior Editor, DC Velocity   09:00

I agree the innovation is just amazing to watch these days, absolutely. Melinda, thanks so much for being here. I really appreciate it. Thank you for your time.

Melinda McLaughlin, Vice President, Global Head of Research, Prologis  09:11

Thanks for having me.

Victoria Kickham, Senior Editor, DC Velocity   09:12

Back to you, Dave.

David Maloney, Editorial Director, DC Velocity   09:14

Thank you, Melinda and Victoria.

Now let's take a look at some of the other supply chain news from the week. Ben, you wrote this week about Walmart's initiative to build micro DCs in many of its retail stores. Can you tell us more?

Ben Ames, Senior News Editor, DC Velocity   09:29

That's right, Dave. It was a really interesting story that came out this week. We often talk a lot about e-commerce on the podcast, and cover it for the magazine, and for sure there's been a huge boom in the amount of goods that people buy online in the past year. We've all been stuck at home during the pandemic. At the same time, that's led to a lot of store closures and mall closings during the recession.

But we got a big reminder this week that at least one major retailer thinks brick-and-mortar stores aren't going to disappear. In fact, they'll play a growing role in commerce in coming years. What happened was, we learned that Walmart plans to build micro-distribution centers—or micro-fulfillment centers, more specifically—in many of its retail stores. Anyone who's shopped in a Walmart before knows that they tend to use these huge buildings—mega stores. So, many of those facilities will be literally inserted inside those existing stores, while some others will be added onto the building, and the idea is that Walmart will use them as local fulfillment centers to fulfill orders for everything from fresh or frozen groceries to consumables and electronics. 

The company says it's doing that because its customers love the speed and convenience of pickup and delivery orders that they've made online. So this will be a faster way to serve them, by transforming its stores to serve more purposes at the same time. 

The company actually already built a pilot version of one of these things. It's been running in Salem, New Hampshire, since late 2019, but now it says it will build dozens more. So, you can see it's clearly a significant investment. 

The system works by using automated robots, little square shuttles with wheels, to retrieve items from the local fulfillment center there, and bring them to a picking workstation. So, that frees up the employees from walking all over the retail store to fulfill online orders from shelves—although they'll still use that approach for fresh items, like seafood and meat. And the whole process takes just a few minutes, Walmart says, from the time the order's placed until the time that it's ready for either a customer to pick up or for a delivery driver to get it and bring it to a customer's house.

David Maloney, Editorial Director, DC Velocity   11:37

That is interesting. Did Walmart say exactly how these systems will work?

Ben Ames, Senior News Editor, DC Velocity   11:42

They did share some some details, yes. So, Walmart is going to do this by teaming up with three logistics technology vendors: Dematic, Fabric, and Alert Innovation. So, Dematic is a system integrator that's been in the sector for years. They're based in Atlanta. Fabric, which used to be known as CommonSense Robotics, is based in Israel, and they make some of these small robotic shuttles. And then Massachusetts-based Alert Innovation is a startup that actually participated in that New Hampshire store that was the pilot of this. What Alert makes is something called an Alphabot, which combines, in their words, an automated storage and retrieval—ASRS—system with an automated each-picking system. 

So, Dematic said that the whole trend towards this growth and these investments in these micro-fulfillment centers is driven by grocery demand, online groceries. And Dematic said the same point that Walmart made, which is that shoppers love to order that online, and then get the, pick up the order either through curbside delivery, in the store—in-store pickup, or home delivery, so. It's, again, it was a big vote by a major retailer that brick-and-mortar stores are here to stay.

David Maloney, Editorial Director, DC Velocity   12:59

Yeah, certainly a trend that we'll be continuing to follow. It's really, I think, the wave of the future with retail.

Ben Ames, Senior News Editor, DC Velocity   13:06

Yeah, for sure. I actually kind of look forward, when they get these things built, to giving it a shot myself, to see how the whole thing works. 

David Maloney, Editorial Director, DC Velocity   13:12

Right. Thanks, Ben. 

And Victoria, you reported this week on increasing demands for goods-to-person automated systems like we've just talked about. What did you write about in these increased demands?

Victoria Kickham, Senior Editor, DC Velocity   13:23

Sure. Thanks, Dave. 

Yeah, demand for robotic goods-to-person material handling systems is expected to quadruple over the next two years as organizations look for ways to enforce social distancing in their warehouse. That's pretty much the size of it, according to new research from Gartner that I reported on, as you noted. 

So, goods-to-person systems, as most of our readers know, are those that deliver goods from storage to a person in a picking or packing station, essentially. And the robotics portion could include a range of technologies, including robotic shuttles, mobile robots, things like that. 

The researchers point to a number of reasons for the growing popularity of these types of systems, but one of the most interesting is that they are less invasive than other types of social distancing tools we've heard about, specifically those kinds of tools that track employees' movements. They reason that keeping people in place while using a virus-resistant robot to move goods around respects people's privacy and keeps them safe at the same time. So, it's kind of a win-win when you're looking to distance people in the warehouse. 

David Maloney, Editorial Director, DC Velocity   14:22

What are some of the other benefits that Gartner mentioned in their research?

Victoria Kickham, Senior Editor, DC Velocity   14:25

Yeah, good point. Well, what we've long heard about these types of systems in general is that they can dramatically improve efficiency and productivity, and that some of these types of systems can also provide greater storage density. Examples of that include those, you know, those really large systems that move totes of goods in and out of a storage system or matrix. This can really help companies on a variety of levels, of course, but especially those that have been struggling to manage growing volumes of e-commerce orders in the last year. 

The research also makes some recommendations for companies as they investigate implementing these types of types of systems. And one I thought was worth noting is that they suggest identifying use cases for goods-to-person solutions by studying travel patterns in your warehouse, and specifically looking for social-distancing bottlenecks—you know, places where it's difficult to get things done, or things get backed up due to social-distancing protocols. So those types of situations, if you can identify those, will be easy targets for these systems.

And again, they just see explosive growth over the next couple years.

David Maloney, Editorial Director, DC Velocity   15:24

Yeah, it certainly seems that way. Thank you, Victoria. 

Victoria Kickham, Senior Editor, DC Velocity   15:28

You're welcome. 

David Maloney, Editorial Director, DC Velocity   15:28

We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories, and also check out the podcast notes section for some direct links on the topics that we discussed today. So go there to check it all out.

Thanks, Ben and Victoria, for sharing highlights of the news this week.

Ben Ames, Senior News Editor, DC Velocity   15:46

Thank you, Dave.

Victoria Kickham, Senior Editor, DC Velocity   15:47

Yeah, thank you. Good to be here.

David Maloney, Editorial Director, DC Velocity   15:49

And thanks again to our guest, Melinda McLaughlin of Prologis, for being with us today. We encourage your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com.

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