IN REAL ESTATE, ‘FROTHY’ IS THE WORD USED TO DESCRIBE A MARKET IN WHICH THE PRICES OF ASSETS ARE JUST BEGINNING TO RISE ABOVE THEIR REAL VALUE BECAUSE OF HIGH DEMAND. THESE ARE THE MARKET CONDITIONS PRECEDING A MARKET BUBBLE.

By: Kim Corwin | AH Harris

After hearing the word repeatedly over the past few months, I had to look up the exact definition. In real estate, ‘frothy’ is the word used to describe a market in which the prices of assets are just beginning to rise above their real value because of high demand. These are the market conditions preceding a market bubble.

TCA Managing Director Mitch Bloomquist and I attended the National Association for Industrial and Office Parks (NAIOP) Industrial Conference (I.CON) on June 5-6, 2014 in Jersey City, NJ. NAIOP is the organization that represents commercial real estate developers, owners and investors of office, industrial, retail and mixed used properties. Multiple speakers throughout the event used the word frothy repeatedly.

I.CON was well attended with over 500 attendees, sponsors and presenters including Liberty Property Trust, Prologis, Colliers International, Lehigh Valley Economic Development Corporation, CBRE, Bed Bath & Beyond, Kuehne & Nagel, WW Grainger, Cushman & Wakefield, Powers Brown Architects, BOA, Wells Fargo, Duke Realty, Port of Virginia & Trammell Crow to name a few. One attendee (@chris1stva) Tweeted, “It’s a who’s who of industrial real estate here.” The mood of the event was very energetic, positive and confident with nearly everyone predicting strong growth over the next 5 years.

According to many of the attendees, ecommerce is changing the industry overnight. It was stated that the rate of change in retail in 2013 was 10 times faster than it was 10 years ago, and the rate of change in 2014 will be substantially greater than 2013. This is translating in to huge demand for industrial real estate. Kevin Welsh, CBRE stated that in 2013 they experienced the “strongest growth in industrial tenant demand since 2006 [in New Jersey].”

The fact that ecommerce is driving construction was a surprise to me. Everything I have read to date voiced concerns over ecommerce taking away the need for retail brick and mortar stores and therefore indicated a decrease in construction and employment, which I thought would negatively impact the economy and our business. The circumstances are, in fact, quite opposite. Ecommerce is driving construction and job growth across the board and creating new opportunities in new places.

Retailers such as Grainger and Bed Bath & Beyond, who both presented at I.CON, indicated that they are adding numerous new facilities to service their growing ecommerce customer base. “Customers WANT, but may not desire to pay, for different service offerings,” said Jeff Macak, Vice President, Global Supply Chain for Bed Bath and Beyond. He was referring mainly to the increasing demand for same-day shipping, next-day delivery and even same-day delivery. This was a theme throughout the event.

Lange Allen, Executive Director, U.S. Industrial/Logistics Development for USAA Real Estate Company, explained, “Parcel delivery is the ‘log jam’ in ecommerce today.” Because of this, companies are looking for space closer to their customers. Warehouses and distribution centers are moving into infill lots and along new transportation corridors. Inland ports are popping up at key crossroads and everything is being streamlined.

Developers want and need ecommerce distribution ready space. The types of facilities required for ecommerce distribution are not only larger – the 500,000 SF warehouses of yesterday are being replaced with 1,000,000 SF, 1,500,000 SF and 2,000,000 SF facilities – but they are also different in layout and design requirements.

The driver here is that the demand for warehouse space is switching from the place of production to the place of consumption as next-day and same-day delivery become more and more of a consumer expectation. Retailers are moving from using distribution centers that supply goods to stores to using combined distribution and fulfillment centers. This requires more facilities and more employees.

Several speakers highlighted the differences between conventional warehouses and ecommerce facilities. They are getting taller. Facilities are required to have a minimum of 40-foot clear height and most retailers want or need them to be even taller. This is due largely to higher racking and layers of mezzanine levels. The added height is good news for tilt-up construction since the only panel size limit is the size of the crane available.

The centers also have different parking and parking lot requirements. Ecommerce Distribution Centers require one space for every 2,000 SF whereas in the past it was one space for every 5,000 SF. They also require trailer parking for 700-800 trailers. The centers have to allow for inbound and outbound trailer flow.

Another trend, somewhat thanks to the rise of ecommerce, highlighted at the event was the dramatic increase in demand for light industrial. Increasing absorption rates are creating development opportunities in key markets across the US. Demand is outstripping available supply for the first time in a long time. The demand is coming from food and construction related users, as well as small manufacturers as on-shoring and re-shoring become more dominant than off-shoring.

This trend is expected to prompt more speculative and build-to-suit development of smaller-scale facilities, which the market has not seen in the past 8-10 years. This wave will bring state-of-the-art buildings to market featuring higher clear heights, trailer parking, speed bays and wider column spacing, all of which are conducive to tilt-up construction.

While much of the current industrial development activity is concentrated on the giant distribution facilities, construction of smaller scale properties is on the rise. This trend serves as a barometer of entrepreneurial optimism that is driving an important segment of the US economy.

To learn more about the latest tilt-up trends and opportunities attend the TCA International Convention, September 29 – October 1 in San Jose, CA. More information can be found at www.tilt-up.org/convention.