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“IT’S ALL ABOUT THE SUPPLY CHAIN”- REBusiness Interview with Mark Duclos, SIOR, CRE

Proximity to transit hubs will remain a key driver of industrial real estate activity, says SIOR president-elect Mark Duclos, SIOR, CRE

Interview by John Nelson

This article originally appeared in RE Business.

A month after terminating its agreement to carry Amazon’s air deliveries, FedEx has opted to not renew its contract with the eCommerce giant that ended Aug. 31 for ground deliveries. In recent years, Amazon has invested in its own delivery services such as fleets and cargo planes and now will have to recalibrate ahead of the 2019 holiday shopping season without support from FedEx.

Mark Duclos, SIOR, CRE, President-Elect of the Society of Industrial and Office Realtors (SIOR), says the FedEx-Amazon fallout is the latest example of how e-commerce firms and their supporting companies are still figuring out how to best optimize their logistics networks. “It’s all about squeezing costs out of the supply chain,” says Duclos, who also serves as president of Sentry Commercial, a commercial real estate brokerage firm covering Southern New England. “Transportation is still the No. 1 cost for e-commerce companies, and they continue to try to squeeze dollars out of those costs.”

E-commerce companies are cutting down on transportation costs by strategically locating their facilities both closer to their customers and also near transportation hubs such as seaports and airports. For example, Boston-based e-commerce giant Wayfair is investing heavily in port submarkets, including a new 1.1 million-square-foot facility near Port of Savannah that will create 1,000 jobs. “Where is the product coming from and how do you get it to the end-user?” says Duclos. “Obviously air and sea are two significant links in the supply chain, so airports and ports will continue to be busy areas for industrial development.”

REBusinessOnline.com recently caught up with Duclos, who will take over as SIOR president at the organization’s 2019 Fall World Conference in October. Duclos will serve his one-year term immediately as he replaces outgoing president Robert Thornburgh of Kidder Matthews. What follows is an edited transcript of the Q&A with Duclos:

REBO: In our 2018 interview with SIOR past president Del Markward, he said the biggest emerging trend was developers taking older urban warehouses and multi-story properties and converting them into last-mile fulfillment and storage facilities. A year-and-a-half later, is that an established trend?

Mark Duclos, SIOR, CRE: It’s still a trend as e-commerce companies are trying to get closer to the consumer. In populated cities, there’s not an awful lot of available real estate so companies are looking at alternative options, which includes an existing single-story product or brand new multi-story properties. We’re absolutely seeing that driving up the cost for a product that was obsolete but has now become relevant. As far as multi-story development, we’re not seeing that in tertiary markets. It’s more in the major markets where there is a massive population that these companies are trying to reach. That type of development is not running rampant across the country.

REBO: What are some of the pros and cons of industrial real estate perhaps “going vertical” in bigger markets?

Mark Duclos, SIOR, CRE: The cost to develop a multi-story project is much more expensive than a single-story project. The positive is that companies are getting closer to the consumer base so they’re not giving up the preference geographically. The cons are functionality. Companies have learned how to make multi-story work, but that’s not the preferred method of distribution. The preference is still to distribute out of single-story facilities. The capital markets are still questioning the viability of multi-story distribution and warehouses. That’s something they’ll get more comfortable with over time, but they’re worried that if that user transitions and goes to another facility, what are they left with?

REBO: Talk for a minute about how Amazon and other e-commerce companies are continuing to push the need for warehouses, distribution centers and fulfillment centers around the country.

Mark Duclos, SIOR, CRE: It’s more of the same, it’s not a recent phenomenon. Here in Connecticut, Amazon just opened another 1 million-square-foot distribution center in the southern part of the state. The company has a couple lastmile facilities and another 1.5 million square feet in northern Connecticut. Amazon also has a 200,000-square-foot sortation center in central Connecticut. Those facilities have all come on line in the past three or four years. The pressure on warehouse and distribution product in just about every market that’s populated will continue to see the same from the Amazons and Wayfairs of the world. The requirements might change, but there’s going to be a continual need for those facilities moving forward.

REBO: Outside of e-commerce, what other industries or drivers are spurring demand for industrial real estate?

Mark Duclos, SIOR, CRE: E-commerce is a universal driver, but outside of that a lot of the other industries driving demand are pretty market-specific. For instance, in Connecticut, our top drivers are arguably aerospace and healthcare/bioscience. But that may not be the same for Cincinnati. Industrial is a very local business.

REBO: How have automation and robotics impacted industrial real estate on the ground level? Have there been any fundamental design changes to accommodate new technology?

Mark Duclos, SIOR, CRE: Robotics and automation have changed the internal processes for these users and it has changed the way e-commerce users are utilizing their warehouses and manufacturing facilities. There is no question that the design of the distribution center three years ago is different than the design of that same company’s distribution center today. Accounting for robotics and automation is not as much of a challenge for the build-to-suit market because they’re designing these warehouse facilities based on those new specs. The real challenge is for developers that are building speculative buildings coming on line in 12 to 18 months. They might be building a spec project that may not be suitable for these companies because of the changes in robotics and what that process is changing in the design of the building. We’ve had national meetings with a lot of knowledgeable people, and there will be discussions on topics such as the ideal clear height for a warehouse or the ideal column spacing. If there are 10 people in that room, you’ll probably get five different answers. The other major question is truck parking. About five or six years ago it was not a big deal, but now truck parking is one of the largest components of a spec development. There is a need for excess truck parking, whether directly at the facility or on a separate site near the facility. We get calls sometimes from sellers that want to convert their building downtown to a warehouse but they have zero parking, so it’s not going to work.

REBO: Is there a growing demand for cold storage facilities as grocery delivery becomes more prominent in the United States?

Mark Duclos, SIOR, CRE: Yes, absolutely. But it’s still such a small part of the overall industrial market. The Food Marketing Institute and research firm Nielsen are projecting 100 million square feet of cold storage will be built in the next five years. That’s pretty significant, especially since I haven’t seen any new cold storage development for most of my career. Online grocery is driving that growth in demand. The largest percentage of cold storage demand will be in gateway cities like Los Angeles and New York. In Connecticut, we have two cold storage requirements that my firm is handling, but we have zero product available to put the users in. So if we do place them, it’ll have to be new product.

REBO: How is the legalization of marijuana for medicinal and recreational use in many states affecting demand for industrial space?

Mark Duclos, SIOR, CRE: Generally, legalization of medical and recreational cannabis has had a positive effect on industrial real estate. However, the significance of that impact varies from state to state depending on when they changed their marijuana policies. SIOR held its Fall World Conference in Denver in the fall of 2018, and some of the attendees were treated to a tour of the Denver industrial market. The effect on industrial real estate in that market was significant. In comparison, the State of Massachusetts legalized marijuana in December 2016, but the effect on the real estate market, while positive, has not yet been significant.

REBO: Since the passing of the Tax Cuts and Jobs Act, are industrial owners and developers taking advantage of the opportunity zone program?

Mark Duclos, SIOR, CRE: I haven’t seen much talk about opportunity zone transactions taking place yet nationally. In Connecticut, we’re seeing a lot of interest in opportunity zones, but we’re not seeing any transactions that were specifically driven by the federal program. People are still trying to completely understand the benefits of opportunity zones. There is more information coming out about the program and how investors can utilize it to generate deals, but I don’t see those transactions happening yet. However, we are seeing marketing from brokers, landlords and developers that are incorporating opportunity zones into their advertising for sites.

SIOR is a global professional office and industrial real estate association based in Washington, D.C. The organization has more than 3,300 members in 686 cities and 36 countries. Learn more about membership at go.sior.com/results.

 

This Q&A was also featured on the following publications:

Southeast Real Estate Business

Texas Real Estate Business

Western Real Estate Business

Northeast Real Estate Business

Heartland Real Estate Business

Heartland Real Estate Business Monthly Issue

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