E Commerce, Automation & Our Sustained Love Affair With Industrial Real Estate

 by Erik Foster (Chicago)

As the holiday retail season kicks into full gear, we’re seeing technology play an important role in reshaping e-commerce. From robots to sophisticated inventory tracking systems, today’s warehouse and distribution centers are filled with technological advances designed to get the right products at the right time to the consumer. 

As same-day delivery, online order/in-store pick up and other shopping variables take root, technology will continue to play an important role in retailer’s online strategy. There’s an amazing transformation occurring inside the four walls of most newer industrial buildings, but the change is particularly striking in e-commerce buildings.

Consider what Amazon is doing with Kiva robots in its distribution facilities. By using these robots, the online giant is able to improve its operating efficiency by more than six times that of a regular distribution facility. Here they are in action: https://www.youtube.com/watch?v=UtBa9yVZBJM 

This technology also is being integrated in food services facilities, such as the new Preferred Freezer facility in Washington State that serves the agricultural industry. Rising more than 10 stories tall, the facility is the size of eight football fields. It is fully automated and cost more to build than many office buildings!  It allows Preferred to maximize its real estate footprint on the site and operate its regional distribution hub in the most efficient way possible: http://choosewashingtonstate.com/and-you-thought-you-had-a-big-freezer/

As I discussed at the recent KPMG Global Real Estate Conference in downtown Chicago, industrial assets are multi-purpose, ever evolving and quickly adapting to the use of the latest technology. Business Intelligence estimates that the most prolific business users of technology are the manufacturing, transportation and warehousing sectors, and they will spend an estimated $275B over the next five years growing their businesses. 

Why Industrial is Unique

The other major asset groups (apartments, office and retail) are, by in large, single purpose in nature.  They are there to serve a tenant whose primary reason for occupying that space has not changed much over the years.  Technology and the way we live today are having an impact on those asset classes too.  Yet, the interior of an office building layout and the design of living space within apartments have been fairly static for many years.

Industrial buildings continue to gain momentum as one of, if not the, preferred building types for investors to own.  It will be fascinating to watch the fundamentals of this exciting asset class continue to lead commercial real estate innovation into 2016 and beyond.

Potential Impacts to the Real Estate Market from Legalization of Marijuana

By Amy Erixon, Toronto                                                     

During the recent federal election in Canada, incoming Prime Minister Justin Trudeau made a campaign pledge to legalize recreational use of marijuana, a position consistent with the views of 68% of Canadians according to recent polls.  This debate has been ongoing for over 15 years.  Medicinal use was first upheld at the appellate court level in 2000 in Ontario.  Although the Federal Government reaffirmed the status of cannabis as an illegal “controlled substance” in 2012, most jurisdictions are, at best, light on enforcement. 

The US has also been liberalizing its treatment of cannabis, with Colorado being the first North American jurisdiction to legalize it entirely, in 2012.  Public support in the US of legalization peaked at 58% that year and currently stands at 53% nationwide as numerous experiments in decriminalization and commercialization of the industry unfold. 

 Status of marijuana laws by US states, according to Wikipedia:   

Only 11 US states have failed to liberalize marijuana statutes while 15 states have decriminalized possession entirely - a policy supported by President Obama to reduce incarceration rates and terms associated with non-violent crimes, and disproportionately affecting minority youth.  

My December, 2013 blog forecasted that the law could be a boost, both directly and indirectly to the local real estate market, particularly for industrial space.  In practice that has come to pass, with returns for the entire Denver industrial market in 2014 substantially outpacing every other sector of the US real estate market, although grow-ops occupy only 3% of the standing inventory.    Retail properties have been favorably impacted at the margin, but the most important impacts have been swelling tax receipts ($134 million in revenue in 2014) and regional boost to the GDP associated with all aspects of the industry including tourism. 

In Washington State the impacts have been more muted.  Regulatory controls are tighter and taxation is so steep (45%) that little progress is being made to stamp out the black market, which often turns up in the parking lots of licensed dispensaries.  In both states experts believe that the GDP benefits of being a “first mover” are outsized due to supporting production for medicinal sales in neighboring states which may be repatriated as more states move toward legalization.  

In practice, a majority of the problems that have arisen are a result of conflicts between the federal statutes and laws at the local level, which would be avoided if Canada acts at the Federal level first.   The most serious problem to date has been the federal rules which preclude transaction support by chartered banks for activities deemed illegal at the federal level, regardless of contradictory local laws.   As a cash only business, the number of potential landlords is severely reduced (to properties where there is no mortgage), and the incidence of robberies increases where large amounts of cash are being handled.  This too may have contributed to disproportionate rent increases for properties shouldering the burden of these complications. 

However controversial legalization might be, a federal law clarifying the rules going forward would help to avoid some of the issues being experienced south of the border with a more piecemeal approach - and could also be seen as an early win for the Liberal government.