Emerging Trends in Real Estate 2012 - Urban Land Institute

Chapter 4: Property Types in Perspective
Best Bets
Follow global trade routes and understand the logistics needs
of shippers as more retail goods sell over the internet. “Users
rethink supply chains and operate from multiple regional distribution
centers to lower fuel costs,” but the locations remain
the usual handful of hub markets with the best access to ports,
international airports, interstate systems, and rail lines (regaining
some market share from trucks). The global trade markets along
the coasts firm their positions as “the best places to invest.”
Enhancement plays concentrate on converting 18- and 24-foot
space into 36-foot clear buildings in the best markets. “Ceilings
go higher and higher. Owners can expand capacity and
revenue potential on the same land footprints.” Some interviewees
tout “good regional markets with lower growth prospects
and higher cap rates. Centrally located cities like Columbus,
Indianapolis, Louisville, and Memphis prove attractive for
e-commerce fulfillment strategies. Kansas City and Harrisburg
provide excellent rail access, and Phoenix is well-positioned
near the West Coast as a lower-cost alternative to California
“and even Texas.”
Exhibit 4-10
U.S. Industrial Property Total Returns
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
1991
1993
1995
1997
1999
2001
2003
NAREIT
2005
2007
NCREIF
2009
2011*
Avoid
Old, increasingly obsolescent space “needs a new purpose.”
Low-ceiling warehouses in off locations become increasingly
superfluous during the slow recovery and will be weeded out
as tenants gravitate to new facilities with better distribution
capabilities. The just-in-time game makes long-term storage
less important.
Development
Aside from special-purpose distribution facilities for e-commerce
purveyors and the odd new warehouse in major hubs,
building activity should remain subdued. All attention turns to
East Coast ports, which jockey for new Panama Canal traffic
and the potential for game-changing expansion. Winners should
see a major ramp-up in distribution center development activity
and infrastructure construction over the next five to ten years.
Among the hot contenders: either Savannah or Charleston can
link to Atlanta’s airport and interstate highway hub serving a
growing car manufacturing region, Miami benefits from proximity
to Latin American markets, while northern New Jersey,
Baltimore, and Norfolk have direct access to major Mid-Atlantic
and New England population centers. Houston along the Gulf
Coast also makes a strong case to serve all regions. Deepening
shallow ports and building new rails and highways to move
goods through populated districts will be major challenges just
as government budget constraints crimp funding infrastructure.
“It all comes down to where shippers can access the most
Sources: NCREIF, NAREIT.
*Data as of June 30, 2011.
customers,” as well as raw political clout: politicians must deliver
federal bacon to pay for harbor projects.
Outlook
Prices probably have topped out after a fierce run-up, and
chronic slow growth impedes chances for a strong, near-term
rebound. Occupancies and operating revenues will take longer
than usual to rise. The sector desperately needs economic
improvement to spur more manufacturing, construction projects,
and consumer spending—all of which drive goods movement.
The Panama Canal widening “shouldn’t create a sea change
along the West Coast.” Over time, L.A.–Long Beach, San
Francisco, and Seattle ports “may lose some market share, not
volumes.” Any increase in U.S.-based manufacturing would
help some markets, “but exports don’t use as much warehouse
space as imports.” Concern will grow about the dilapidated
state of aging interstates, tunnels, and bridges, as well as
worsening congestion around major gateway cities—potentially
disrupting logistics schedules and increasing costs. “The sector
has become all about distribution rather than storage.”
Emerging Trends in Real Estate ® 2012
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