American Realty Advisors


Market Commentary, September 28, 2023

In Conversation: Future of Industrial Demand

Despite moderate increases in vacancies, industrial continues to be the bright spot in the overall landscape of commercial real estate. But just as e-commerce and changing consumer habits have led to the bull run, the sector is not immune from disruption, especially as the rapidly advancing technology of robots, drones, and autonomous vehicles have many distributors rethinking their supply chains.

In the latest installation of our In Conversation Series, ARA CEO Stanley Iezman and Head of Research Sabrina Unger discuss potential disruptors to industrial real estate and technology that stands to impact where and how industrial users occupy space.


Stanley Iezman: We at ARA have a big position in industrial real estate, and from a strategy standpoint, I have two questions: Number one, why is there such great demand for industrial in today's world? And number two, what are the disruptions that we anticipate are going to impact industrial demand in the foreseeable future?

Sabrina Unger: The key drivers of industrial demand are really a function of changing consumer expectations. Whereas, 10 or 15 years ago, if you ordered something online and it showed up at your door in three-to-five days, we were perfectly happy with that. Now, as consumers, we want things more quickly than that. It went from three-to-five day shipping to two-day, to next day, to same day. And that necessitates retailers, 3PLs, and users of industrial warehouses to be closer to their end-users. That ultimately means a greater demand in aggregate.

To answer the second part of your question though, which is, what are some of the disruptions we see potentially on the horizon? We really don't have to look that far into the future to see things like nearshoring and reshoring being an element of industrial demand going forward that we really haven't had in the last couple of cycles. One of the things that the pandemic showed us is just how fragile just-in-time inventory supply chains are. If anybody was left wanting for toilet paper because it wasn't coming into their stores, you understand how waiting for things to come from overseas, go through a port system – it’s really fragile, and one link in the chain breaking can be really detrimental to businesses. I think what we're seeing now is companies look to add redundancies closer to home.

I don't think we're going to see manufacturers completely pull out of places like China or Taiwan, but what they may try to do is replicate a part of their process closer to home to try to create more of those redundancies.

SI: When we're talking about disruptions, let's talk about the impediments of political pressure in local communities where they don't want to have logistics facilities in their backyard. How do you handicap that and how do you think about that from an investment strategy standpoint?

SU: So the NIMBY-ism, the “not in my backyard-ism” related to industrial is very real. We are seeing markets that historically we never thought there would be any sort of moratorium or cap on new development push back on it. People are going to their city councils, they're saying, "We don't like the truck traffic, we don't like the damage to the roads, the noise," what have you. What that means for those markets is there may be less supply going forward in aggregate. Now, what that means for investors and for managers like us, is if we own assets there, they just became more valuable because there's not as much competition. It may also ultimately push demand into other markets entirely. Let's take the Inland Empire for example. Vacancy, I believe is sub 3% still.

SI: Yes.

SU: That's an area where a lot of these communities are saying, "No more. We don't want any more warehouses," for all the reasons I mentioned. So if you're a user and you need a big box, you may want to distribute from Las Vegas or Phoenix instead. It's going to distribute demand into other markets, which in actuality, is probably a net positive for the industrial space.

SI: You’re suggesting that consumer demand is going to be increased for goods and services coming from industrial facilities. Does that mean that aggregate space demand is going to continue to increase over time and that we should be bullish on the product type?

SU: Overall, yes. I think we are fully expecting the pace of e-commerce gains, as well as overall consumer spending to moderate going forward. So that's certainly an expectation. But by and large, continued growth is still the outlook.

SI: Is there anything that we should be thinking about with regard to industrial that we aren’t talking about? Is there something out there that you think could be impacting industrial that would be negative?

SU: I think there could be disruptors, maybe not absolutely negative. And it sounds quite futuristic, but our longer-term outlook on the sector factors in things like autonomous or driverless trucks, things like delivery drones. Again, it sounds really far out, but some of these technologies are already on the road. Though passenger vehicles are different than a semi-truck, Level Two autonomy - which is basically where the car can drive itself you just need to be in the driver's seat to get it into the garage - already exists in mass, and there's a growing adoption of that.

In reality, driverless trucks may not be that far off. In March of last year, in fact, there was a truck used in a trial. It was going nonstop for five days between Dallas and Atlanta, and over the course of five days, the semi traveled over 6,000 miles, made four round trips, and hauled something like 8,000 freight tons. Now, the same truck with a singular driver, it would take 10 days to cover that same mileage, to move that same amount of tonnage, because the Department of Labor has limits on how long a single truck driver can be in the cab. We're really not that far off. It could be incredibly innovative. It's incredibly disruptive as it relates to the relied-upon patterns of demand when we think about specific industrial markets.

SI: You mentioned drones earlier, and the idea of having delivery drones flying around and dropping packages off to your front door. How do you think this really works in terms of delivery of goods in the infill markets or even suburban markets?

SU: I will caveat being interested in drones and us thinking about it in terms of our outlook for industrial with the fact that I don't think in my lifetime we're going to look out this window and see highways of drones with Amazon packages attached going by. The reason I think that is:, which is a Chinese company, they're effectively the Amazon equivalent in China. They have been testing drone delivery of packages since 2015, and they're doing it in the outskirts of Beijing and four other provinces, and they've delivered thousands of packages. But if you go to Beijing proper, you're still not seeing thousands of these things in the sky.

They're really being used for rural deliveries of things like medicine and other time-sensitive items. I don't think we'll get to a place where drones are completely replacing last-mile, on-the-ground delivery. What I will say, though, is the FAA has become incrementally more friendly to this idea. So again, we're starting to see companies trial deliveries, but I think if we were to see it in some scale, it's less likely that we'll see it in cities and more likely that we'll see it in rural or exurban areas first.

SI: What do you think of automated robots delivering goods, driving down the street?

SU: I think when we think about delivery robots, whether it's an urban or some other setting, part of it is whether the inhabitants of that city are friend or foe. Many years ago, there was a company that sent out a hitchhiking robot to try to make its way from Canada all the way down to Florida. It got about halfway, and it encountered some less-than-friendly folks, and it didn't complete its trip. These robots are expensive. I think people that are going to deploy these technologies want to make sure that, A) they're effective, and B) they can be returned to the store. So again, I think it's more of a niche function rather than something that we'll see in mass. There are certain companies that are leveraging it. I know Domino's is testing out a pizza delivery robot, but it's on college campuses. So very specific use applications.

SI: Well, certainly the fact that technology is going to increasingly impact the utilization of industrial space is probably one of the most prevalent conversations we're going be having over the next five years.

This transcript of the ARA In Conversation discussion has been edited for clarity.

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The information in this video is as of March 1, 2023, and is for your informational and educational purposes only, is not intended to be relied on to make any investment decisions and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments in any jurisdiction. This video expresses the views of the author as of the date indicated and such views are subject to change without notice. The information in this video has been obtained or derived from sources believed by ARA to be reliable but ARA does not represent that this information is accurate or complete and has not independently verified the accuracy or completeness of such information or assumptions on which such information is based. Any opinions or estimates contained in this video represent the judgment of ARA at the time this video was prepared and are subject to change without notice. This video is proprietary to ARA and may not be copied, reproduced, republished, or posted in whole or in part, in any form and may not be circulated or redelivered to any person without the prior written consent of ARA.

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