It's Time for 3-D Thinking in Industrial Sector

SEATTLE—The concept of 3-D applies to industrial real estate in more ways than one—although the rise of 3-D printing is certainly a factor, according to K.C. Conway, chief economist, USA, for Colliers International. “Industrial investors must also go beyond the 2-D of land and sea movement of goods to a 3-D analysis of capital, physical location and physical design,” Conway writes in his new report on the sector, titled “Thinking in '3-D'.”

Conway offers specifics on the metrics to be considered in this 3-D model. For capital, it's interest rates, cap rates and IRRs; for physical location, variables include proximity and connectivity to ports, intermodal facilities and e-commerce fulfillment; and for physical design, it's factors such as clear ceiling heights of 30 to 36 feet, larger truck courtyards and so on. Those who take this into account “will be rewarded with higher-yielding assets in less volatile markets,” he writes.

But 3-D printing itself will have an impact, Conway predicts, by further accelerating “the convergence of retail and warehouse real estate. How will 3-D printing revolutionize where goods are manufactured, distributed and warehoused? Already we are seeing the impact of 3-D printing on shoe manufacturing.”

As a greater amount of materials is being made available for 3-D printing applications, “a broader array of manufactured goods can be made 'just in time,' in proximity to customers, with less need to store and distribute goods,” Conway writes. That has far-reaching implications in terms of “how much of what we buy at a store could be made on demand and on site, to exact specifications, without the need for a finished product supply chain or distribution centers.”

There's another 3-D, as it were, in the thinking that investors need to apply when analyzing industrial real estate, writes Conway. “E-commerce is inextricably linking retail and industrial real estate,” according to Conway's report. “Transportation efficiencies are driving the where, what and how much of industrial warehouse space.” That's especially true as the industrial sector, and the US economy as a whole, sits on the verge of what Conway calls “the First Post-Panamax Decade,” namely the 10 years after the Panama Canal reopens with broader channels to accommodate much larger ships.

Especially given Colliers' forecast of 2% to 2.5% GDP growth this year, Conway doesn't see a risk of overbuilding, even as new supply—including spec development as well as build-to-suit—is coming on line. Although 28.9 million square feet of new product was added across North America in the fourth quarter alone, or about one-third more than in the previous quarter, “only 45% of that new supply was speculative,” writes Conway.

In fact, BTS is behind the increasing supply of warehouse space, especially in the US, where about 60% of the 24.3 million square feet added in Q4 was BTS. Further, Conway observes that the US market absorbed approximately 50 million square feet of warehouse space per quarter since 2011, compared with just 20 million square feet of new construction.

In calendar year '13, Conway writes, “the 65 major US industrial markets absorbed 188 million square feet of space compared with just 80 million square feet of new supply being added. In other words, the US industrial markets continue to absorb more than twice the new supply being added.”