Significant News in Logistics & Industrial Real Estate

Week of October 13, 2019

Welcome to Significant News in Logistics & Industrial Real Estate, a weekly and monthly newsletter where I highlight and comment on the most important stories in industry, the economy, and industrial real estate.

REAL ESTATE
Key Themes

  • Demand for industrial space picks up after a slow start to 2019
  • Industrial users are not only demanding variable footprints but also a variety of clear height, land, and power requirements
  • A future with autonomous vehicles should be considered when designing today’s commercial real estate

The U.S. industrial real estate market continues to thrive supported by e-commerce and warehouse/distribution demand. After a slow start to 2019, demand picked up in the Third Quarter of 2019 with 48.7M square feet absorbed according to Cushman & Wakefield’s latest report. Year-to-date absorption registered 148.8M square feet and is on pace to break 200M square feet for the sixth straight year. 


For the first time in nine years, construction supply is on track to exceed demand by around 70M square feet in 2019. However, much of the 337.6M square feet in the pipeline is either build-to-suits (72.5M square feet) or pre-leased (72.3M square feet) with the remaining 109.3M square feet going towards speculative construction. The amount of speculative new construction should provide additional avenues for tenant growth in tight markets and is not expected to adversely impact rent growth or market values.


With the slow down in demand, asking rents rose 3.2% year over year in 3Q 2019 down from 7.2% in 3Q 2018. Rents are projected to rise modestly has the economy likely grows slowly or contracts slightly. I would anticipate the strongest rent growth in the primary markets but also in some secondary markets like Salt Lake City, which is one of the hottest markets in the U.S. right now. #industrial real estate

Amazon continues to open massive fulfillment centers across the country such as a 1 million plus square foot facility in Channahon, Illinois, about 11 miles southwest of Joliet. Sure, e-commerce is driving smaller buildings in some infill markets but big box distribution centers are not going away. What is changing is the efficiency within the big box. Amazon is rumored to be their fourth or fifth version of a multi-level fulfillment prototype which combines racked storage with sortation in a vertical delivery system. If distribution does skew more into smaller footprints, it is likely to be due to continued developments in how product is stored and moved in the box and not just getting close to the customer. #Amazon #e-commerce #Chicago

To say that FedEx has been in the news lately is an understatement. Two real estate deals involving FedEx were notable this week. First, FedEx filed a $212M building permit with Memphis, Tennessee to improve and expand its presence at the Express World Hub at the Memphis International Airport. The total investment of the expansion is expected to be more than $1B is scheduled for completion in 2025. The State of Tennessee provided more than $20M in tax brakes for the new hub. 


Second, a 252 door terminal FedEx leases in West Jefferson, Ohio was sold by Griffin Capital Essential Asset REIT for $30.3M or $120K per door to Sealy & Company. No word on what FedEx is paying but if one assuming an 8% return that would equate to a monthly rent per door of $800. #FedEX #Memphis #Terminal

Autonomous vehicles are predicted to change real estate and logistics in many ways and developers are starting to design properties accordingly. In the industrial real estate world, autonomous vehicles would likely impact site selection, employee parking, truck court design, and overall ingress/egress pathways onto sites. I wrote about this topic back in 2017 when the technology was just starting to clear pathways to full autonomy in the form of driver assist technology, otherwise known as Level 1 autonomy. Now we are seeing Level 3 autonomy in vehicles, meaning the vehicles handle driving tasks but still may need intervention. Level 4 and Level 5 are what we think of as the driverless stages, where in certain environments the vehicle is driverless (Level 4) and in all environments the vehicle is driverless (Level 5). Most do not believe these latter levels are achievable in the near future, with most predictions falling in the middle part of the next decade.


Since the average useful life of an industrial property is 40 years, even if we are 10 years away from Level 4 or 5 autonomous vehicles they will likely impact industrial buildings being designed and built today. Randy Thompson with Cushman & Wakefield’s Build-to-Suit group, recently wrote an article for Area Development where he discussed “Future-Proofing” buildings to account for autonomous vehicles. We will likely see future industrial property design include smaller to no employee parking lots, expanded and separate drop-off areas, and smaller truck court areas as autonomous trucks become more common. In addition, since an autonomous vehicle does not need to rest, secondary and tertiary markets may become more attractive for distribution into even infill areas. #AV #technology

INDUSTRY
Key Themes

  • The logistics industry is investing heavily into technology to improve supply chains and support customers
  • Various economic and industry indicators point to a balancing trucking industry in 2020 and steady growth in the warehousing sector
  • Companies continue to enter and exit the last mile delivery space as Amazon and FedEx expand their last mile services

Logistics companies continue to invest heavily in technology to enhance a variety of functions and needs in their organizations. One area getting a lot of investment is technology to help increase visibility in the supply chain. Offering customers the ability to understand where their freight is located in real-time should increase as the Internet of Things (IoT) populate throughout the supply chain. Companies such as Flexport, who recently purchased container tracking company Crux, have made significant investments in “bolt-on” technologies to enhance their current and future tracking capabilities. 


In addition to serving external customers, companies such as Merck KGaA have partnered and acquired technology to allow them to better predict inventory requirements throughout their own supply chains. The large pharma company has partnered with TraceLink, Inc. to use analytics and machine learning to predict and prevent drug shortages. Merck not only wants to save lives by eliminating drug shortages in their supply chain, but also a lot of money. According to the research and analysis firm Gartner, pharmaceutical companies carry an average of 156 days of inventory compared to 78 for consumer product retailers and 57 days for IT equipment sellers. By better predicting inventory requirements, Merck could reduce its inventory requirements and expedited shipping charges allowing them to save potentially hundreds of millions of dollars. 


Another area where companies are investing heavily is automation within their supply chain. While vehicles get a lot of the press, automation of other functions may be equally or more important to the improvement of a company’s supply chain or those of their customers. For example, Amazon recently purchased digital customs broker INLT to help their third-party sellers import goods through U.S. Customs without an outside customs broker. Other companies, such as Shopify, have acquired technology firms to help automate and improve functions such as material handling, storage, and other warehouse functions. 
In addition to acquisitions, logistics companies are also partnering with technology firms to offer better service to their customers. The LTL carrier Estes Express has recently partnered with nearby Warehowz to give customers access to their available warehouse space on-demand. Flexe, a competitor of Warehowz, has developed a customer base of direct-to-consumer companies who can take advantage of the flexibility and cost savings of unused warehouse space. 


Information security is another area where logistics companies have invested and collaborated for the good of the industry. The Blockchain in Transport Alliance (BiTA) is a consortium of technology and transportation firms formed to create blockchain standards for the freight industry. The consortium has 500 members with over $1T in revenue annually. Their newest member, Prologis, is perhaps an acknowledgement of the important role large real estate owners can play in the security of information and the overall security of the supply chain.


Lastly, there are concerns that the investment and development of supply chain technologies is creating an abundance of ‘unhelpful’ solutions. The pace of technological growth is seen by some to exceed the logistics sector’s ability to consume. Furthermore, many technologies have been designed with only part of the supply chain in mind and therefore can create barriers to future integration efforts. #technology #Flexport #Crux #Amazon #INLT #IoT #Estes #Warehowz #BiTA #Prologis #blockchain

Various economic and industry indicators point to a somewhat improving picture for logistics in the U.S. The trucking industry is expected to rebound in 2020 with truckload rates potentially seeing growth in early 2020. The trucking market appears to be headed towards a equilibrium between freight and capacity next year, but certain challenges remain. J.B. Hunt, for example, missed on profit expectations last quarter due in part to increases in its costs for recruiting and retaining drivers.


Meanwhile, warehousing continues to steadily grow as e-commerce companies continue to gobble up space. According to the CSCMP Logistics Manager Index, the pace of growth is expected to be less than years prior and warehouse capacity is expected to increase for the first time since June. With the growth in warehousing, material handling orders have increased as well. The Conveyor Equipment Manufacturers Association (CEMA) reported its August 2019 booked orders increased 58.1% compared to August 2018 and were up 27.2% over July 2019. #trucking #J.B. Hunt #CSCMP #material handling

Last mile delivery is a dynamic part of the supply chain as companies are continually announcing reductions or expansions in the service area. Last week, Inpax Final Mile Delivery announced it was laying off at least 718 workers and Letter Ride over 900 workers after losing contracts with Amazon, reportedly due to Amazon’s review of their safety practices.  Following Schneider’s announcement that they were shuttering their final mile delivery business last month, FedEx announced this week that it is expanding its FedEx Freight Direct service, which delivers bulky items into residences and businesses, to cover 80% of the population. #last mile #Inpax #Letter Ride #Amazon #FedEx

ECONOMY
Key Themes

  • A handshake agreement has halted some of the trade war between the U.S. and China
  • Economic indicators were mixed with the Federal Beige Book indicating slow growth in the U.S. while retail sales saw a slight dip in August

There was a bit of good news this week regarding the trade negotiations between the U.S. and China. The so-called Phase I handshake agreement postponed certain tariffs on goods from China in exchange for promises to purchase large amounts of agricultural goods from the U.S. However, trade experts warn that the agreement is just a temporary pause to allow for further negotiations to take place and many of the promises made seem unrealistic or uncertain. For example, China promised to purchase $50B of U.S. agricultural goods-which is double the most they have purchased from the U.S. previously. Also, many more important issues remain unsolved such as intellectual property rights, national security concerns, and tariffs not discussed under the Phase I agreement. #trade 

Economic indicators were mixed this week with some positive indicators from consumers and negative markers for retail sales. The Federal Beige Book, which summarizes the areas which the Federal Reserve considers when making decisions, reported slower growth in regions throughout the U.S.  In particular, the Midwest and Great Plains are growing slower than the South and West regions. Some manufacturers are starting to layoff workers due to weak orders while others are cutting hours in order to retain their workforce and avoid potential re-hiring and retraining costs in the future. The big question is will the weakness in business confidence seep into the consumer sector, which is still seen as an engine of growth. Average hourly earnings are up 3.2% YOY, household savings rates are triple what they were in 2005, and consumers have less debt overall. However, retail sales fell 0.3% in August, the first monthly decline since February, which is potentially an indication that the consumer confidence is softening. #growth #consumer confidence #retail sales