The Coming Disruption of Industrial Real Estate
There are a few technologies (exponentially improving, driven by variants of Moore’s Law) that are in various stages of an 'S' growth curve in both performance and market acceptance. When deployed to the market in a combinatorial manner, these technologies will present a unique threat/opportunity to disrupt industrial real estate and related markets due to changes in customers' supply chains. The disruption will most likely vary by market in both timing and scalability. In a prospective manner, as William Gibson has written, “The future is already here—it’s just not very evenly distributed.”
Recommendation: Organize your strategic real estate leaders and form an enterprise cross-functional team to define your challenge; enlist internal and external subject matter experts; scenario-plan the future of supply chains and the resulting impact on industrial real estate. Outputs will include how best to shape your CRE investment to take advantage of defined opportunities and reduce exposure to identified risk, based on long-term scenario analysis.
Your goal is to understand at a high level the cone of future scenarios of supply chain evolution and determine the most versatile industrial building types, locations (relative to the end-customer), favorable demographic-geographic market attributes (absolute as well as trended), future value-add services that may be needed to compete; and then execute your operations and investment portfolio decisions into your future investment/divestment pipeline.
In addition, you should measure, evaluate and ascribe a value to your own current real estate investments using this same criteria—objectively measure and track metrics that drive value today and into the future. This mash-up metric could include geo-mapping data for distance as well as transportation/response times, transportation alternatives, demographic data within X space/time (population, income, disposable incomes, and wage growth), industry drivers and growth potential short and long term, etc.). A great book on the differentiating value of location/markets/growth is The New Geography of Jobs by Enrico Moretti. How does the market ascribe this relative valuation? Does your relative valuation differ from the market in the short/long term? If so, have you uncovered an opportunity?
What is the price of inaction or lack of execution?
The relative level of disruption most likely will be similar to the experience in suburban commodity office space, where significant degradation in asset value occurred (unevenly by market), with an overall reduction in space demand resulting in over-supply, repeating itself year after year.
If you did not have a chance to experience the suburban office market cycle as a landlord, just imagine a world where year after year, customer demand shrinks for your product despite a roaring economy. Your customers are doing great, business is up, and employee count is up as well. Your customers simply don’t need as much space to operate; they are becoming more efficient—and this efficiency in costing you money. This annual degradation in demand continues unabated, like a very slow-moving tsunami, swamping landlords and office parks across the country. Historically, employment and the economy had always been a great predictor of office demand. UNTIL IT WASN'T. The driver in this ongoing transformation includes new business models powered by exponential and combinatorial technologies that were stitched together to create something very new. New business models provide real estate as a service, identifying excess unused capacity, ultimately yielding much higher utilization rates, with the downside (at least from a landlord’s perspective) of the need to reduce supply. In an industry that had not seen much change in the previous decades, it has been and will continue to be devastating to historical players that are/were unable to adapt. However, experience from market to market varies significantly. There is much to learn from this variation.
Now if you take that same scenario and play it out in industrial space, what might you find? Market disruption happens in the margins. Imagine a world where demand for industrial space reduces year over year regardless of level of economic activity and world trade; negative net absorption replaces the historical model of 50-300 MSF annual demand absorption. New build-to-suit space is highly preferable over existing stock. The resulting deceleration of demand, accelerating building obsolescence will degrade industrial building value in certain locations, markets and building types. Your mission, if you choose to accept it, should be to find the industrial real estate sweet spot, where one can enjoy good returns on your current portfolio and have resiliency in your business model. One that promotes an ability to compete, demand a premium for your product/services in the future, driven by disruptive supply chain business models. What services will provide a competitive advantage, provide differentiation in the marketplace? What value can be uncovered in business data that can provide value to customers, consultants or an untapped customer segment?
What are the technologies that could prove to be so disruptive?
A sample of the technologies in play includes the following: AI (both machine learning and deep learning systems); blockchain technology; robotics and autonomous transportation systems (ground and aerial); additive manufacturing systems (3-D printing) and applied materials; IoT and mesh networks; wireless network technologies (5G / 6G ++); electric vehicles, solar and battery technology. These are but a few of the emerging technologies that will impact our future supply chains. Most of you have seen individual presentations on each but what is not known are the future combinations and timing of those combinations that may occur.
These technologies will be combined with other non-exponential improvements, e.g., materials packaging, new business models, transportation infrastructure, as well as other influences (think STEEP-C analysis - Social, Technology, Economic, Environmental, Political, and Competition). The frenzied pace of incremental efficiencies (in addition to the potential exponential changes) in supply chain networks will continue on an arithmetic scale (% improvement).
If the disruption is similar to our suburban office example, the disruption will start from combinations of tech and business models. It could leverage both mature and emerging technologies, manifested via a new competitor inserting themselves into your marketplace with a very different value proposition, and a different business model.
The drivers in this continuing transformation are new business models powered by exponential and combinatorial technologies that are stitched together to create something very new. New business models that provide real estate as a service, identifying excess/unused capacity, and ultimately leading to higher utilization rates, resulting in oversupply. In an industry that has not seen much change in the previous century, it has been and will continue to be devastating to historical players who are unable to adjust to this new reality.
Why should you change?
Presently, industrial customer demand has placed the wind at your back. Since the Great Recession, customer demand has increased unabated, year after year. E-commerce retail sales have grown annually, far in excess of traditional retail sales. This trend will continue to disrupt retail real estate and drive re-purposing of retail real estate.
Your industrial customers, however, are evolving, modifying and improving their supply chains in shorter and shorter cycles, re-engineering to meet and/or exceed customer expectations. At the same time, e-commerce retail customer expectations have moved dramatically. In just the last few years, customer expectation have gone from delivery in a week, to delivery in days, to two days and now one day—and in some markets, one-hour delivery. This customer expectation has resulted in significant re-tooling of supply chains. Improvements in supply chain costs and efficiency are required core competencies just to enable companies to stay in the game.
Summary: The evolution of supply chains has followed a familiar pattern: from slow reactive systems to an anticipatory (real-time) system; an evolution starting with the long-term goal of supplier integration, morphing to supplier collaboration, adding flexibility and resilience as core requirements, and ultimately leading to a demand driven transformation. The ability to react to customer demand real-time and orchestrate a supply chain as an immediately responsive network has been a long-term goal for most companies. Many of your customers are moving along this evolutionary continuum—striving to achieve this demand-driven model.
The evolution of supply chains driven by customer demand will impact Industrial Real Estate significantly. For those companies that get in front of this, consider options and properly execute, there is great opportunity. For those that do not, the risks are rising—time is not on your side. How this evolution manifests itself in future location decisions, transportation methods, raw materials movement and storage, location and method of manufacturing, reverse logistics, labor supply, demographics, wage growth—is for you to find out. Sooner rather than later.
This Week’s Sponsor
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The 10th anniversary of CoRE Tech will be held at the San Jose Convention Center on November 13 – 15, 2019. This unique event attracts the most proactive, visionary and innovative Corporate Real Estate and Facilities executives and thought leaders under one roof. They gather to learn about the latest groundbreaking automation, explore more efficient ways to manage, maintain and operate their space, and to discuss technology strategies that will help their organizations achieve their real estate goals. CoRE Tech features Industry Speakers from around the globe, an innovative, comprehensive Education Program, Executive Briefings and Project Tours in Silicon Valley, and a Smart Building and Campus Best Practice Case Study Showcase featuring leading Tech Solutions.
This year’s theme of REcalibration focuses on identifying challenges, embracing innovative ideas and discovering new opportunities for how we design, build, lease, operate, transact and use Corporate Real Estate and Facilities. Everyone involved in running a corporate real estate organization must fully understand how this next chapter of the Digital Revolution will affect their role and the organization as a whole.
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UPCOMING REALCOMM WEBINARS
Top GLOBAL INNOVATIONS of 2019 Impacting Commercial and Corporate Real Estate - 12/12/2019
2019 will likely be another year of great innovations for the Commercial and Corporate Real Estate industry. With a multitude of new companies and ideas being funded by an insatiable appetite of investors, the traditional workflows and processes of Real Estate are challenged daily. Add to this a desire by the established marketplace to also innovate and the pressure of change increases. This webinar will bring together some of the industry’s most prolific prognosticators who will discuss and debate the state of innovation in our industry for 2019. For those firms that are leaning into the change brought about by technology this is a perfect opportunity to hear about the leading solutions, case studies and best practices.
Founder of Realcomm Conference Group, an education organization that produces Realcomm, IBcon and CoRE Tech, the world's leading conferences on technology, automated business solutions, intelligent buildings and energy efficiency for the commercial and corporate real estate industry. As CEO, Jim interacts with some of the largest companies globally pertaining to some of the most advanced and progressive next generation real estate projects under development.
Jeff Chulick is the Technology and Innovation Leader for EY Real Estate Services. He leads a global team of professionals focused on the identification, innovation, design and realization of technology solutions that greatly enhance the workplace experience. His areas of focus include digital strategy, smart workplace, IoT, visual communications, workplace management, physical access and audio/visual technology. Jeff has over 20 years of enabling workplace strategies and delivering innovative solutions for EY and external clients across many different industries.
John Dulin is a 30-year global telecom and enterprise executive and has held senior positions in product management, marketing and sales in the areas of fiber optics, wireless and new technology development. Currently with Corning, John is focused on introducing its fiber optic and wireless innovations to the commercial real estate market.
Craig Stevenson is President of AUROS Group, a technology company based in Pittsburgh, PA. He is widely known for his role in establishing Pittsburgh as a leader in "Evidence-based Performance" for the built environment. Evidence-based Performance uses technology to bridge the gap between "hoping" a building is performing as designed to "knowing" a building is meeting its performance goals. He is credentialed in virtually all known building performance standards. As a result, Craig focuses solely on owner's performance requirements for their building(s).
Marc is a pioneer in leading the Intelligent/Smart Buildings and M2M movements pushing the industry forward and has contributed to transforming and changing the Intelligent Buildings and M2M (now IoT) industries. As Chief Marketing and Communications Officer for Lynxspring Marc leads corporate and product marketing, strategy, brand management, public relations and communications that support the company’s strategic and growth initiatives.
As Chief Innovation Officer, Jeff Clark leads the development and delivery of new offerings at RF Connect, properly positioning the company and our clients for the critical trends of technology convergence that define our era in telecommunications. Since joining RF Connect in 2016, he has introduced our software-defined wide area mesh network that provides industry-leading monitoring and LTE transport connectivity for RF Connect’s clients nationwide. Jeff also champions RF Connect’s bold entry into the private LTE segment.