With uncertainty abounding about the economy in general, one thing is certain: the industrial real estate market is a good place to be. In fact, JLL is predicting that demand for industrial real estate in the US will grow by an additional one billion square feet by 2025. For reference, that’s an addition of more than 17,361 football fields’ worth of industrial space within the next five years.
While industrial buildings tend to shy away from flashy building materials and rarely make the cover of a magazine, they are nonetheless a critical part of our country’s infrastructure. These buildings are, among other things, where we manufacture, house and distribute both perishable commodities and consumer goods.
Here we will explore a little more about the industrial real estate market as it pertains to construction, with a particular focus on the trends we see in the Pacific Northwest.
Types of Buildings and Uses
Industrial real estate serves a variety of end-users and may include light manufacturing, warehousing and distribution, showroom space, light office, retail, movie production, or food storage and/or production, among other things. Buildings may be constructed in a variety of ways, most commonly of the following types:
In previous generations, concrete block was commonly used for exterior wall systems, but seismic concerns and inefficiencies with constructing large buildings has largely phased this method out. There is some speculation that Cross Laminated Timber (CLT) may be considered in the future for exterior building skins on industrial projects, as focus shifts towards more sustainable construction practices.
The size of industrial projects varies greatly from small footprint buildings for single businesses, to warehouse and distribution centers spanning over one million square feet. In general, these buildings include wide open floor plans, often with rows of racking, equipment and forklift operations. Interior clear heights – the height from the floor to the underside of any obstructions at the roof structure – also vary, with heights climbing in recent years to 40 feet and beyond.
Industrial developments typically need easy access to freeways or other modes of transportation, such as airports or marine ports, and in more recent years are moving closer to consumer locations with the rise of e-commerce. They also require large, preferably flat parcels of land, ranging from a few acres, to 40 acres or more for very large buildings. Area traffic, permit and development fees and access to utilities such as power, water and gas also play a role in site selection.
The Rise of Technology in Industrial Developments
One factor increasing the complexity of industrial market construction is the rise of technology use. Automation through the use of robotics has been on the rise for years. Forklift guidance technology via guide wires that are embedded in concrete slabs has been a part of warehouse construction for quite some time. Increasingly, we are seeing even more technology that must be included in our building packages to accommodate loading and unloading at dock doors or embedding technology for driverless forklifts. It’s possible that as automation increases, the need for a skilled labor force nearby will decrease. These larger industrial buildings could then be located in increasingly rural locations, where land is more readily available and is less expensive.
What Makes Developments Pencil
Development of industrial projects are all about dollars and cents, and a budget bust of even one dollar per square foot can mean a project doesn’t move forward. The material components that make up most of these types of buildings include:
- Rigid Insulation
- TPO Roofing
- Structural Steel
An increase in the price of these items can certainly affect whether a project moves forward or not. 2020 has seen relatively steady prices for projects. Some materials prices have decreased, and though labor prices continue to rise, many contractors are looking for innovative solutions to keep costs down, perhaps in anticipation of an economic downturn, to ensure they have a healthy backlog of work.
In addition to tracking materials and labor pricing closely, the large site sizes that accompany industrial projects require careful consideration of the excavation work needed. In fact, one of the largest risks to an owner in terms of cost and schedule delays is the site work package. Complications with building sites can arise from a variety of factors, including, but not limited to:
- Soft soils
- Hazardous materials abatement
- Presence of large boulders
- Increasing erosion control requirements
- Site dewatering and discharge
- Weather delays associated with moisture sensitive native material
- Haul distances for importing or exporting material
As Perlo’s Senior VP of Operations, Chris Gregg says, “the earth work is a dance. You have to be familiar with the site, the risks, when to amend the soil, how to anticipate weather challenges and how to adjust the site strategy as the project evolves”. A strong contractor who is familiar with the site will have the best chance of managing the risks associated with it.
A Cyclical Market
The real estate cycle is cyclical, and the industrial market is no different. Depending on supply and demand, we observe locally that the industrial market shifts between speculative construction and build-to-suit. In other words, when the market is ‘hot’, developers are willing to construct speculatively, without having a tenant in place to occupy it at the time they begin construction. When the market slows, we see developers wait to build until they have a tenant pre-arranged to lease the building, and then they build it to suit that tenant’s specific needs.
At the beginning of 2020 in the Pacific Northwest, we were very near the point in the cycle where developers were slowing their interest in speculative construction and moving towards build-to-suit only. With the onset of the COVID-19 pandemic, this trend has accelerated. However, construction of industrial product has not stopped. As JLL reported in June, the pandemic has accelerated e-commerce demand within the US, as consumers seek to order more of their goods online. We are still seeing a need for these types of buildings across the Northwest.
Though developers have shifted to a more cautious approach for development this year, they have not stopped purchasing land for future development. Investors have continued to buy and prepare for new developments and are poised with ‘shovel ready’ land when the right deal comes along.
From the time land is purchased, an owner can expect the design and permitting process to take a minimum of six to twelve months, followed by the actual construction time. With this in mind, owners have to consider that if they endeavor to develop their own building, they will have to be prepared for an extended amount of time for the development and construction process to be complete.
The Future of Industrial Real Estate
In the past several decades, we have seen changes in both the building types and materials used for constructing them, which has increased efficiencies in construction and utilization. However, increasing regulation of building codes and a lack of available land in some locations is making development more challenging. In the Pacific Northwest, we are seeing projects extend up and down the I-5 corridor more than in years past, as the supply of large, developable parcels decreases.
At the same time, the rise in e-commerce needs across the country is inspiring some retailers to build smaller footprint distribution centers that are closer to their consumers in lieu of having only a few large distribution centers across the country. It will be interesting to see if this trend also lends itself to redevelopment of brick and mortar locations into small distribution hubs as consumers choose to buy online and demand fast delivery.
The COVID-19 pandemic has also led to questions about the domestic supply chain. Will we see manufacturers make efforts to move production facilities back to the US? If so, the industrial real estate market will certainly benefit.
For the immediate future, all signs point to a strong build-to-suit market in the industrial space. We anticipate that deals will become more creative in terms of redeveloping existing property and responding to the needs of the booming e-commerce market.
If you are considering an industrial development, our preconstruction teams excel at providing preliminary budgets for consideration. Reach out here to start the conversation.