Amazon warehouse in Ruskin, FL

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This isan HTML version of an article that ranin Real Estate Forum. To see the story in itsoriginal format, clickhere.

|

E-commerceis changing the face of industrial real estate—literally. Althoughe-commerce is nothing new—Amazon came on the scene in 1994 andsurvived the dot-com bubble bursting six years later—e-commerce hassurpassed early pundit expectations to revolutionizeretail.

|

For many retailing giants, e-commerce has become as much anindustrial and logistics function as a storefront function—and some21st century retailing giants don't have a storefront operation atall. At the same time, technologies like drones are allowingdelivery of many household items in less than an hour. But, again,it all comes back down to warehousing and logistics.

|

In response to e-commerce trends, as well as newfangledtechnologies and government requirements, developers are shiftingcommercial real estate strategies. Instead of building massiveindustrial facilities based on historic specs—or even constructingwarehousing with more loading docks and higher ceilings—developersare catering to the exact requirements of tenants withbuild-to-suit development.

|

E-commerce is the primary driver of a new wave of BTSdevelopment trends. According to market research firm eMarketer,online retail grew 20% in 2015 compared to 2014 and should grow atabout that same rate in 2016. E-commerce currently accounts for6.7% of all retail globally and will grow up to 7.4% by the end of2016, the firm reports.

|

“E-commerce users are looking for a specific type of asset—withclear heights, trailer parking, washrooms, HVAC within thewarehouse, light, power, a mezzanine—and until now, these reallyweren't available in second-generation buildings,” says ScottMarshall, executive managing director of industrial services forthe Americas at CBRE. “So because of this, they had to turn to newbuildings, driving BTS.”

|

Most of Amazon's distribution centers are BTS. Likewise, HomeDepot has shifted its development strategy from new stores to BTSfulfillment centers, like the one at Prologis Park 1-75 South inMcDonough, GA that came on line in 2013. Prologis has built severaldistribution centers for Home Depot. And Mars/Wrigley Candyoccupied a 1.3-million-square-foot, multi-temperature BTSdevelopment in Joliet, IL in 2015.

|

While e-commerce is requiring newer, state-of-the-art, warehousespace, technology is affecting how warehouse and distributionfacilities are operated, according to attorney Michael Jones ofCole Schotz, a law firm that works with Fortune 500 companies inthe Mid-Atlantic.

|

“Governmental regulations are changing the manner in whichwarehouse facilities are developed,” Jones explains. “For example,new governmental regulations further limit the maximum average workweek for truck drivers, thereby increasing the need for moretrailer parking.”

|

Charbel Farah, senior principal, Syska Hennessy Group, says thetrend goes beyond e-commerce. As he sees it, BTS or design-buildprovides an opportunity for collaboration, accountability andinnovation while keeping construction budgets under control.

|

“Tenants are increasingly seeking innovative solutions, andthose tailored specific solutions are being delivered via both newand off-the-shelf technologies in engineering, construction andarchitecture,” says Farah. “We are seeing sustainable designapplications and strategies such as harvesting the sun, the microclimate and the wind being implemented to create healthy and costeffective spaces.

|

Some of CBRE's industrial tenants, especially e-commerceclients, are seeking high-end material handling systems inside thefour walls of the building so they can move product throughout thewarehouse with scanning and conveyer technology.

|

“The tolerances of these technologies need to be so tight,because the products need to be scanned and end up in the rightspot within warehouse,” Marshall says. “We're also seeing automatedracking, clear-height racking that exceeds 36-foot clear—and it'sall mechanized; it's all robotics.”

|

Industry watchers agree that industrial and logistics tenantsare seeking bigger buildings to accommodate the increase in productbeing stored and shipped. Forty-foot ceiling heights are the newbenchmark and the buildings demand more power for the robotics andconveyer systems that are employed. Wider column spacing—50-foot by60-foot and 60-foot by 60-foot as opposed to 30-foot by 40-foot—hasbecome more common.

|

“More land is required to accommodate increased trailerparking,” says Jones. “Roof loads need to be increased in order toaccommodate solar panels on the roof. Office space within awarehouse building is being constructed to accommodate a higherdensity of workers, with less private offices therein, consistentwith the new trends in office design. These buildings require moreloading doors. It's not uncommon to see two loading doors for every10,000 square feet of floor area, an increase from one loading doorfor every 10,000 square feet.”

|

Jones recently represented a national big box retailer thatwanted to improve the efficiency of its logistics to lower itsdistribution costs and keep its stores stocked continuously. Tothat end, the company invested in a major project to replace itsolder warehouse facilities with state-of-the art rapid deploymentcenters across the US and entered into BTS leases for facilities toits specifications.

|

A typical facility included a 450,000- to 650,000-square-footbuilding on approximately 50 to 80 acres, with 30-foot clearheight, 400 trailer parking spaces, heavy power, 170 loading doorsand a state of the art racking system. Jones says the building isdesigned as a cross-dock facility to have product delivered, inbulk, to one side of the building, then broken down and sorted inthe interior of the building, then loaded onto trucks parked atloading docks on the other side of the building for delivery to theretailer's stores.

|

“We're no longer just helping a client locate its requirement atthe corner of Main and First,” says Marshall. “Now, we're helpingour clients evaluate their supply chains and full transportationcosts. We're not just providing industrial brokerage services, buthelping clients with all of their logistics needs.”

|

Are we witnessing a sea change in development or just ashort-term trend? How big is the demand for BTS industrial andlogistics facilities? As long as e-commerce, the primary driver,continues growing the BTS trend should continue growing right alongwith it.

|

“This is not a short-term trend,” says Marshall. “This is asystemic change in our business, where retailers are looking ate-commerce as a going concern. The way people are buying products,and therefore the way retailers need to fulfill orders, is a changein the landscape of our business not soon to disappear.”

|

Marshall sees plenty of developers building on spec, and saysthey need to anticipate both an e-commerce fulfillment requirementas well as a “standard” warehouse or distribution requirement.Therefore, he says, they design for the building to accommodatemezzanine, additional power or additional washrooms but it isanticipated as an “addition” and the base building would beconstructed without these improvements.

|

From his perspective, Jones sees a lot of pent up demand for newstate-of-the-art warehouse buildings, which should take asignificant period of time to satisfy.

|

“There are also many developers and tenants which are new to theNew Jersey market while there's a shortage of state-of-the-artbuildings to accommodate their requirements,” says Jones. “Ianticipate that we will see robust development of spec buildingsand BTS construction to accommodate the changing needs of tenants,particularly as more existing buildings become obsolete.”

|

With every opportunity come challenges—and BTS is no exception.Clearly, the BTS trend is gaining momentum, especially in theWestern United States and should continue driving through majormarkets in the years ahead. But it won't always be easy to get thebuildings out of the dirt.

|

“Securing financing and ensuring that the right partners are inplace—such as engineers, architects, manufacturer, andoperators—are the primary challenges,” says Farah. “However, afterthese elements are in place, a BTS project is in an excellentposition to meet the goals of property owners and tenants.Heightened collaboration drives innovation while delivering thebest value and performance.”

|

Jim Martell, president of Ridge Development, a private REIT inChicago, sees pricing as the big issue today. The spread betweenthe going-in yield and the exit cap rate is very thin, he says,maybe 50 basis points or even less in some cases where thedeveloper will do it for a fee. This would require the developer tohave a core buyer as a capital partner.

|

Meanwhile, Jones says the biggest challenges developers facetoday is coping with the shortage of vacant land while needing toconstruct larger buildings with more parking. “Developers must bewilling to take on more risk by trying to tackle environmentallychallenged sites that they might have stayed away from in the past,and they must be able to entice tenants to want to lease thesesites,” he says.

|

Developers also need to be more flexible in the way that theyare designing BTS buildings. Marshall says, for example, developershave to be able to design and build an asset that can be usedeither for e-commerce or a normal distribution stream.

|

“You don't want to build an e-commerce-ready building and haveit be taken by a straight distribution user, because thosee-commerce-specific improvements are going to go to waste,” heexplains. “Conversely, if you build a straight distributionbuilding and an e-commerce user takes the space, sometimes youcan't go back.”

|

With so much new construction, the question is this: How is theBTS trend impacting the overall industrial and logistics market?Are older buildings becoming obsolete?

|

“Older buildings aren't becoming obsolete in an overall marketsense, but obsolescence is certainly an issue when it comes tobuildings that cannot accommodate trailer parking, car parking andceiling height demands of the users today,” says Martell. “Thatsaid, certainly there are users that can backfill some of thefacilities that do not meet the requirements for an e-commercebuilding.”

|

While some owners of older industrial and logistics buildingsare racing to upgrade or retrofit facilities, especially if theyhave any extra land, others are looking for ways to create healthyand pleasant environments for tenants. At the same time, newdelivery methods are emerging to meet client-specific needs fortenants who will lease buildings for 20 or 30 years.

|

“We are seeing a shift in the building sector with variousdelivery methods such as performance design build, CMAR,public-private partnership and integrated project delivery,” saysFarah. “With these methods, we are seeing more collaboration andshared responsibility among teams that harness the best talent inengineering, architecture, construction and financing.”

|

Amazon warehouse in Ruskin, FL

|

This isan HTML version of an article that ranin Real Estate Forum. To see the story in itsoriginal format, clickhere.

|

E-commerceis changing the face of industrial real estate—literally. Althoughe-commerce is nothing new—Amazon came on the scene in 1994 andsurvived the dot-com bubble bursting six years later—e-commerce hassurpassed early pundit expectations to revolutionizeretail.

|

For many retailing giants, e-commerce has become as much anindustrial and logistics function as a storefront function—and some21st century retailing giants don't have a storefront operation atall. At the same time, technologies like drones are allowingdelivery of many household items in less than an hour. But, again,it all comes back down to warehousing and logistics.

|

In response to e-commerce trends, as well as newfangledtechnologies and government requirements, developers are shiftingcommercial real estate strategies. Instead of building massiveindustrial facilities based on historic specs—or even constructingwarehousing with more loading docks and higher ceilings—developersare catering to the exact requirements of tenants withbuild-to-suit development.

|

E-commerce is the primary driver of a new wave of BTSdevelopment trends. According to market research firm eMarketer,online retail grew 20% in 2015 compared to 2014 and should grow atabout that same rate in 2016. E-commerce currently accounts for6.7% of all retail globally and will grow up to 7.4% by the end of2016, the firm reports.

|

“E-commerce users are looking for a specific type of asset—withclear heights, trailer parking, washrooms, HVAC within thewarehouse, light, power, a mezzanine—and until now, these reallyweren't available in second-generation buildings,” says ScottMarshall, executive managing director of industrial services forthe Americas at CBRE. “So because of this, they had to turn to newbuildings, driving BTS.”

|

Most of Amazon's distribution centers are BTS. Likewise, HomeDepot has shifted its development strategy from new stores to BTSfulfillment centers, like the one at Prologis Park 1-75 South inMcDonough, GA that came on line in 2013. Prologis has built severaldistribution centers for Home Depot. And Mars/Wrigley Candyoccupied a 1.3-million-square-foot, multi-temperature BTSdevelopment in Joliet, IL in 2015.

|

While e-commerce is requiring newer, state-of-the-art, warehousespace, technology is affecting how warehouse and distributionfacilities are operated, according to attorney Michael Jones ofCole Schotz, a law firm that works with Fortune 500 companies inthe Mid-Atlantic.

|

“Governmental regulations are changing the manner in whichwarehouse facilities are developed,” Jones explains. “For example,new governmental regulations further limit the maximum average workweek for truck drivers, thereby increasing the need for moretrailer parking.”

|

Charbel Farah, senior principal, Syska Hennessy Group, says thetrend goes beyond e-commerce. As he sees it, BTS or design-buildprovides an opportunity for collaboration, accountability andinnovation while keeping construction budgets under control.

|

“Tenants are increasingly seeking innovative solutions, andthose tailored specific solutions are being delivered via both newand off-the-shelf technologies in engineering, construction andarchitecture,” says Farah. “We are seeing sustainable designapplications and strategies such as harvesting the sun, the microclimate and the wind being implemented to create healthy and costeffective spaces.

|

Some of CBRE's industrial tenants, especially e-commerceclients, are seeking high-end material handling systems inside thefour walls of the building so they can move product throughout thewarehouse with scanning and conveyer technology.

|

“The tolerances of these technologies need to be so tight,because the products need to be scanned and end up in the rightspot within warehouse,” Marshall says. “We're also seeing automatedracking, clear-height racking that exceeds 36-foot clear—and it'sall mechanized; it's all robotics.”

|

Industry watchers agree that industrial and logistics tenantsare seeking bigger buildings to accommodate the increase in productbeing stored and shipped. Forty-foot ceiling heights are the newbenchmark and the buildings demand more power for the robotics andconveyer systems that are employed. Wider column spacing—50-foot by60-foot and 60-foot by 60-foot as opposed to 30-foot by 40-foot—hasbecome more common.

|

“More land is required to accommodate increased trailerparking,” says Jones. “Roof loads need to be increased in order toaccommodate solar panels on the roof. Office space within awarehouse building is being constructed to accommodate a higherdensity of workers, with less private offices therein, consistentwith the new trends in office design. These buildings require moreloading doors. It's not uncommon to see two loading doors for every10,000 square feet of floor area, an increase from one loading doorfor every 10,000 square feet.”

|

Jones recently represented a national big box retailer thatwanted to improve the efficiency of its logistics to lower itsdistribution costs and keep its stores stocked continuously. Tothat end, the company invested in a major project to replace itsolder warehouse facilities with state-of-the art rapid deploymentcenters across the US and entered into BTS leases for facilities toits specifications.

|

A typical facility included a 450,000- to 650,000-square-footbuilding on approximately 50 to 80 acres, with 30-foot clearheight, 400 trailer parking spaces, heavy power, 170 loading doorsand a state of the art racking system. Jones says the building isdesigned as a cross-dock facility to have product delivered, inbulk, to one side of the building, then broken down and sorted inthe interior of the building, then loaded onto trucks parked atloading docks on the other side of the building for delivery to theretailer's stores.

|

“We're no longer just helping a client locate its requirement atthe corner of Main and First,” says Marshall. “Now, we're helpingour clients evaluate their supply chains and full transportationcosts. We're not just providing industrial brokerage services, buthelping clients with all of their logistics needs.”

|

Are we witnessing a sea change in development or just ashort-term trend? How big is the demand for BTS industrial andlogistics facilities? As long as e-commerce, the primary driver,continues growing the BTS trend should continue growing right alongwith it.

|

“This is not a short-term trend,” says Marshall. “This is asystemic change in our business, where retailers are looking ate-commerce as a going concern. The way people are buying products,and therefore the way retailers need to fulfill orders, is a changein the landscape of our business not soon to disappear.”

|

Marshall sees plenty of developers building on spec, and saysthey need to anticipate both an e-commerce fulfillment requirementas well as a “standard” warehouse or distribution requirement.Therefore, he says, they design for the building to accommodatemezzanine, additional power or additional washrooms but it isanticipated as an “addition” and the base building would beconstructed without these improvements.

|

From his perspective, Jones sees a lot of pent up demand for newstate-of-the-art warehouse buildings, which should take asignificant period of time to satisfy.

|

“There are also many developers and tenants which are new to theNew Jersey market while there's a shortage of state-of-the-artbuildings to accommodate their requirements,” says Jones. “Ianticipate that we will see robust development of spec buildingsand BTS construction to accommodate the changing needs of tenants,particularly as more existing buildings become obsolete.”

|

With every opportunity come challenges—and BTS is no exception.Clearly, the BTS trend is gaining momentum, especially in theWestern United States and should continue driving through majormarkets in the years ahead. But it won't always be easy to get thebuildings out of the dirt.

|

“Securing financing and ensuring that the right partners are inplace—such as engineers, architects, manufacturer, andoperators—are the primary challenges,” says Farah. “However, afterthese elements are in place, a BTS project is in an excellentposition to meet the goals of property owners and tenants.Heightened collaboration drives innovation while delivering thebest value and performance.”

|

Jim Martell, president of Ridge Development, a private REIT inChicago, sees pricing as the big issue today. The spread betweenthe going-in yield and the exit cap rate is very thin, he says,maybe 50 basis points or even less in some cases where thedeveloper will do it for a fee. This would require the developer tohave a core buyer as a capital partner.

|

Meanwhile, Jones says the biggest challenges developers facetoday is coping with the shortage of vacant land while needing toconstruct larger buildings with more parking. “Developers must bewilling to take on more risk by trying to tackle environmentallychallenged sites that they might have stayed away from in the past,and they must be able to entice tenants to want to lease thesesites,” he says.

|

Developers also need to be more flexible in the way that theyare designing BTS buildings. Marshall says, for example, developershave to be able to design and build an asset that can be usedeither for e-commerce or a normal distribution stream.

|

“You don't want to build an e-commerce-ready building and haveit be taken by a straight distribution user, because thosee-commerce-specific improvements are going to go to waste,” heexplains. “Conversely, if you build a straight distributionbuilding and an e-commerce user takes the space, sometimes youcan't go back.”

|

With so much new construction, the question is this: How is theBTS trend impacting the overall industrial and logistics market?Are older buildings becoming obsolete?

|

“Older buildings aren't becoming obsolete in an overall marketsense, but obsolescence is certainly an issue when it comes tobuildings that cannot accommodate trailer parking, car parking andceiling height demands of the users today,” says Martell. “Thatsaid, certainly there are users that can backfill some of thefacilities that do not meet the requirements for an e-commercebuilding.”

|

While some owners of older industrial and logistics buildingsare racing to upgrade or retrofit facilities, especially if theyhave any extra land, others are looking for ways to create healthyand pleasant environments for tenants. At the same time, newdelivery methods are emerging to meet client-specific needs fortenants who will lease buildings for 20 or 30 years.

|

“We are seeing a shift in the building sector with variousdelivery methods such as performance design build, CMAR,public-private partnership and integrated project delivery,” saysFarah. “With these methods, we are seeing more collaboration andshared responsibility among teams that harness the best talent inengineering, architecture, construction and financing.”

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