AD: Industrial property vacancies are at historic lows and rents at record levels. To what extent is demand today being driven by supply chain and logistics?
Thompson: In 2016, logistics, distribution, and third-party logistics (3PL) companies leased a monumental 21.8 million square feet of space, constituting roughly one quarter of all industrial leasing activity. Vacancies in industrial facilities reached historic lows, while rents grew to historic highs,
according to JLL’s Industrial Outlook 2017. With few speculative options available, industrial build-to-suit developments were up by 29 percent in the first quarter of 2017 over the fourth quarter of 2016.
E-commerce initiatives are driving much of this activity. By transforming consumer culture, e-commerce has sparked tremendous appetite for industrial space. Even companies that are not e-tailers themselves are finding that their supply chain strategies are greatly influenced by the growth of e-commerce and changes in consumer buying behaviors. When you are manufacturing or distributing consumer products for retailers to sell, you are inevitably linked to retailers’ business strategies and their customer demands. Those demands influence corporate supply chain strategies.
AD: When did you first see supply chain and logistics becoming a significant factor in industrial real estate and economic development?
Thompson: Supply chain strategy has always been the driver behind industrial real estate, but the real sea change began about 20 years ago, back in the late 1990s. That period included the evolution of the Internet as well as expansion of free trade agreements, which had significant influence on the supply chain industry. And, as goes the global supply chain, so goes industrial real estate across the globe.
JLL began its supply chain and logistics practice recognizing that, when it comes to industrial real estate — plants, warehouses, and distribution centers — it was about far more than the real estate alone and executing transactions. Our clients expanded their operations globally, and the supply chain world became more and more complex. They needed to connect the dots more efficiently between supply chain and real estate functions.
As companies began to develop their global operations, we could see that our clients really needed help to ensure that the real estate decisions they were making were the most optimal from a supply chain network standpoint. It is critical to understand the operating costs of a distribution center. Logistics can comprise as much as 75 percent of a distribution center’s costs, far outweighing the lease expense. For efficiency, you need to bridge the gap between supply chain and real estate to achieve the most effective solution for the business.
Supply chain management is truly a global industry with companies making and moving products all across the world.
AD: How did globalization change site selection practices?
Thompson: Supply chain management is truly a global industry with companies making and moving products all across the world. This creates a lot of complexity. For years, there has been a disconnect between the supply chain and real estate functions within organizations. The supply chain professionals were responsible for developing the strategy and the real estate professionals were responsible for executing it. For most companies, the two functions were not well connected.
However, industrial real estate decisions involve far more than just negotiating the lowest cost per square foot. Important questions must be addressed. How many distribution centers do you need? Where should they be? How big? How quickly do you need to deliver product? Where should you produce and/or source the product?
The more distribution centers you have, the quicker you can reach customers. However, you’ll also incur more costs. As our clients’ businesses grew more global and sophisticated, the challenges grew.
Today, a company can work with a global team of supply chain specialists, not just in the Americas, but also in Europe, the Middle East, Africa, and the Asia-Pacific regions. They can use sophisticated tools and technologies, as well as the ability to analyze data and assess market dynamics, to make the most optimal decisions.
AD: What has been the impact on warehouse design?
Thompson: Today’s mega-distribution centers are more of a revolution than an evolution from the warehouses of 20 years ago. The advent of e-commerce, warehouse automation, robotics, and other technological innovations is rapidly changing industrial property types. Buildings are larger than ever before, ceiling heights have doubled, floors have strengthened, and robots are flourishing. Technology will continue to have a major influence on supply chain and logistics.
The advent of e-commerce, warehouse automation, robotics, and other technological innovations is rapidly changing industrial property types.
AD: If the United States renegotiates or exits its free trade agreements, how will companies reconfigure their supply chain networks?
Thompson: International trade growth has been slowing for the last five years. According to the World Bank, this slowdown in global trade has been mostly due to global geopolitical uncertainty, from Brexit to the U.S. administration’s focus on “America first” policies.
While trade policy uncertainty has motivated some companies to rethink their operational strategies, there’s also a more practical reason to regionalize manufacturing and distribution: customers. Aside from trade policies, many companies have already been adopting regionalized manufacturing strategies in an effort to make and distribute products closer to their customers. Not only does this improve customer service, but it also reduces freight costs.
We are seeing a return to more regionalized economies and innovative ways to improve on “last mile” delivery to the customer. Companies are feeling pressure to fulfill demand more quickly than ever. It’s critical for companies to continually assess their supply chain strategies and ensure that the most optimal networks are in place.