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NEW YORK—San Francisco has been a valued marketplace for manydifferent asset types—just not so much industrial. Yet, as NewmarkKnight Frank noted in a new report, that is rapidly changing.

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Demand for Class A industrial space in the metro area hasskyrocketed over the past three years, growing from fewer than50,000 square feet of requirements in the market at the start of2017 to more than 1.7 million square feet of requirements by theend of 2019, it said. In addition, over the past three years,asking rents for Class A industrial space have grown 35.9%. Themarket has responded, according to NKF: 1.1 million square feet ofClass A industrial space has been developed or renovated in thattime, and another 1 million square feet is proposed over the nextthree years.

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What has been San Francisco's secret? Many other markets thatare challenged in the industrial sector would like to know.

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The answer is simple and perhaps not surprising: technology,which has been San Francisco's forte for years.

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New companies that have seemingly little to do with commercialreal estate are transforming how industrial space is used. Thesecompanies are leveraging artificial intelligence, machine learning,advanced manufacturing, robotics, and drones to maximize every linkin the supply chain.

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The good news for other markets is that these efforts willultimately spread, NKF said in its report. "As these new companiesseek to revolutionize industrial space and continue to expand, weshould expect to see increased demand for Class A industrial spacein other markets as well."

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Venture capital is backing these developments, according toPitchBook, which reports that these capital providers investedapproximately $19.3 billion in supply chain technology in 2018,setting a record for the industry. While 2019 did not top thatrecord, it was another strong year, NKF said. It noted thatInternational Data Corporation reported that of the $37.5 billionspent on artificial intelligence and machine learning in 2019,sales process recommendation and automation accounts for 25%."

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These changes in supply chain back office technologies aretranslating into new commercial real estate needs. "A number of newcompanies have emerged to capitalize on upgraded technology in theindustrial real estate sector," the NKF report said. "These includecompanies like Flexe in Seattle and Stord in Atlanta, which havedeveloped online national marketplaces for warehousing-on-demand,changing the way distributors plan for inventory space needs,especially those with seasonal fluctuation."

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There are now robotics-as-a-service companies, such as RightHandRobotics in Somerville, Mass., which provides short-term integratedrobotic piece-picking solutions to help with order fulfillment, NKFalso added.

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Another example: Enterprise supply chain management companyFaire operates an online wholesale marketplace of thousands ofmakers, allowing local retailers to curate inventory with the sameefficiencies as their large-box competitors.

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In addition to these new companies, autonomous vehicles aremaximizing the movement of goods in shipyards, docks andwarehouses. The trend of the expanding distribution center is nowalso moving upward, NKF said, as more efficient sorting and pickingtechnology has allowed distribution centers to build higher.

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The number of distribution facilities with ceiling heights of atleast 40 feet has increased materially since 2017, it noted.

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