Industrial Developers Need To Be More Nimble Than Ever

Author: Brian Rogal, Bisnow

Designing distribution spaces was once relatively easy, but the nation’s acute labor shortage, along with the uncertainty introduced by growing online sales, means tenants now demand more, and developers need far greater nimbleness to effectively compete.

“Tenants want everything if they can get it,”  The Missner Group CEO Barry Missner said at Bisnow’s all-day Chicago Industrial Midwest conference this week. The challenge is how to balance providing a laundry list of amenities with rental rates that tenants can afford, he said, a difficult task considering how long today’s laundry lists can get.  

Geoffrey Kasselman, executive managing director of NKF’s national industrial practice, said industrial users now think far more about recruiting and retaining employees. Many demand the types of amenities, such as fitness centers and high-quality food options, typically thought of as office features.

“We’re seeing a lot more emphasis on providing good environments for workers,” InSite Real Estate Managing Director of Development Michael Larsen said. With Amazon and other online sellers forcing companies to reconstruct national supply chains and experiment with new models of distribution, the most important amenity tenants may need is flexibility, whether through short-term leases or buildings easily adapted to other uses, Kasselman said. “They don’t know what business they’re going to be in in five to 10 years.”

He advises developers to have frank discussions with potential tenants about how they expect their businesses to change over the next decade. This could involve not just considering how their specific industry will transform, but also how technology will impact employees’ lives. “Are you going to have electric vehicles coming in to your property, or gas vehicles, and when will that change happen?” Kasselman said.

The possible widespread introduction of driverless vehicles could further revolutionize how industrial tenants utilize their spaces, cutting down the need for parking or requiring the reconstruction of shipping and receiving areas. No one really knows just what change e-commerce will next bring to the industrial sector, and even firms like Amazon, which have led the way, are still figuring it out, said Jeremy Giles, managing director-global head of customer team for Prologis. "It's really in its infancy," he said. As a result, property owners can no longer simply sign lease deals and then go back to the tenant in five or six years when the lease expires to begin fighting over the rental rates again, he said.

Prologis decided to heavily invest in data analytic technology that tracks customer performance, so the groups can work together and brainstorm on improving operations and staying abreast of changes in the marketplace.

Industrial Properties Vice President Taylor Malfitano said rent only makes up about 4% to 5% of supply chain costs, so successful owners need to spend more time interacting with tenants about the other 95%. His firm makes sure to have dedicated teams that regularly meet with tenants, and quickly answer any concerns. "They need to know who to call on our end," he said.

Users increasingly ask for more environmentally sustainable buildings, especially ones that utilize high-tech tools to reduce energy use and cut costs through energy efficiency, WBS Equities President and CEO Wendy Berger said. Her firm, which specializes in creating buildings for food and beverage manufacturers, also works with marijuana-related businesses. One client's hopes for a new property illustrated just how much industrial development has changed. “They said their goal with this building was to heal the planet,” she said.   

But incorporating high-tech tools into new industrial properties remains a challenge, the experts said, partly because lenders, long accustomed to calculating buildings’ future revenues by analyzing the rents of comparable structures, don’t know how to place values on technology. What they need are methods to show how much more tenants would pay for a given high-tech feature. “There aren’t a lot of data points,” Kasselman said.

Furthermore, expectations may change again when the inevitable recession finally arrives, and tenants decide they no longer want to pay much for either amenities or environmental sustainability, said panel moderator Michael Hillebrenner, principal engineer for Roux Associates. “Development is looking down at a chessboard and trying to see the next three or four moves,” Kasselman said.

The legalization of recreational marijuana, expected to take effect in Illinois on Jan. 1, once Gov. J.B. Pritzker signs the bill passed by the legislature on May 31, presents another set of opportunities for developers if they move fast, Berger said. Growers and distributors will need spaces, and an 11-week cultivation cycle does not leave much time to get up and running. "You're going to be looking for sites that are as ready-to-go as possible," she said. Other hurdles include the possibility that some communities will resist any plans to bring marijuana cultivation or distribution to their town, Berger said.

One of the most important aspects of her work is educating municipal officials and community residents that legal marijuana is a business like any other, one run by responsible people. "These aren't a bunch of people sitting around getting stoned." Moderator Paul Klink, NKF executive vice president and head of industrial services, asked Prologis’ Giles to sum up how owners and developers need to approach this new era. Giles advises others to prepare for quick changes over the next few years and not get wrapped up in the current euphoria over the industrial sector’s historically low vacancy rates or the remarkable amount of demand created by the expansion of e-commerce. “We can fall into the trap of thinking we’re smarter than we are.”