Industrial Development and Consolidation Activity Hits Stride

The upturn in development and mergers and acquisition activity signals not only an improving environment for industrial assets, but also reflects the changing structure and dynamics taking place throughout the industry. As part of the ProLogis-Catellus deal, for example, the company is intensifying North America development, both in build-to-suit and in inventory space.

The outcome of the ProLogis-Catellus consolidation and others benefit all parties involved, from the developer to the tenant to the shareholder. As a result, the marketplace is shrinking from a large field of players to a quantified number of large companies.

Investors Upping Industrial Acquisitions
During the first half of 2005, investors spent close to $11 billion purchasing industrial real estate, nearly double what they did in the same period last year. Part in credit to the thriving global trade, bulk warehouses are in demand.

Catellus' purchase isn't the first notable consolidation in the industry. In 2001, Equity Office Properties Trust acquired Spieker Properties Inc., and Keystone Property Trust was also acquired by ProLogis last year. ING Clarion has purchased 250--or $1.6 billion in--industrial properties since 2004.

A real estate portfolio joint venture between CalEast Industrial Investors and LaSalle Investment Management was bought by Deutsche Asset Management's Rreef in May 2005. The $800-million purchase allowed Rreef to acquire 90 distribution properties at 25 airports in the US and Canada.

On the brokerage side of the house, consolidations are resulting in similar outcomes. When CB Richard Ellis acquired Insignia ESG in 2003, the company's presence in urban markets like New York City went from wanting to overwhelming, successfully establishing the world's largest commercial real estate entity the company says can offer clients an "optimal balance of worldwide reach and specialized services."

From a business point of view, consolidation makes sense. Relationship-building is crucial to any deal, and by diversifying a company's business reach, clients satisfied with the service they are receiving from one company will look to fulfill business needs at the same shop. The result? Higher revenue, satisfied clients and less competition.

Global Economy Hits Home
As a whole, the industrial market is seeing significant shifts in tenants and business practices.

During NAIOP's recent industrial conference, leaders from across the country gathered to discuss and debate the challenges facing the industrial segment of commercial real estate today. Conference attendees predicted a brighter future and noted that the effects of a global economy are reverberating through the supply chain. Among the discussions were:

• Far more than outsourcing, the biggest wave to hit the US economy is the shrinking labor force, according to economist Jeff Thredgold. He advised developers to attract tenants from seven critical industries: biomed, energy, entertainment, financial services, technology, transportation and telecommunications.
• Industrial pro formas are feeling the effects of the consolidations and the changing economy, especially in the areas of an influx of capital, rising costs and the demand for increased sophistication and technology.
• High-priced and hard-to-find parcels of undeveloped land--and an aggressive competition with residential developers to acquire it--have resulted in some pension funds buying un-entitled land for the first time.

As the industrial becomes more global, processes will become more efficient. Retailers are always seeking to streamline distribution and reduce warehousing as a way to contain shipping costs, and while a decrease in warehouse demand isn't readily foreseen, a dramatic shift in who is actually involved in the ownership and distribution of goods is expected. National retailers could cut out wholesalers all together and work with manufacturers directly to have goods delivered to their own distribution centers.

New technologies, including RFID (radio frequency identification tags), are transforming the way goods move through the supply chain. The tags enable the content and movements of a shipment to be tracked in real time, allowing goods to more faster and smarter.

Those seeking to avoid hectic ports like those in southern California are turning toward new gateways across the nation, including Houston, Norfolk and Savannah. New rail hubs are popping up in Kansas City, Memphis and Houston, all changing the way goods are shipped and transported.

In Support of Globalization
NAIOP has embarked on several recent projects to support industrial global expansion. The standardization of industrial terminology will ease the variances of jargon used across the country, and NAIOP's Research Foundation is in the process of publishing NAIOP Terms and Definitions: U.S. Industrial Market, comprising definitions and standards for building types, construction terms, development terms, measurement terminology, leasing terms, space use and more.

In an effort to strengthen global relationships and create efficiencies in the North American supply chain, NAIOP is exploring a partnership with its peer organization in Mexico, the Mexican Association of Industrial Parks (AMPIP). The collaboration will connect industrial developers and owners from Canada, the US and Mexico, opening up new business opportunities for all involved.

As the global economy grows, industrial real estate will transform itself to meet the demand for space and changing technology. NAIOP expects its membership and the industrial market-at-large to respond to broader opportunities and new business, and--as it has done in the past--to revolutionize business during the next decade.

Thomas J. Bisacquino is president of Washington, DC-based NAIOP. Views expressed here are the author's solely.