What Companies Want Most In Their Industrial Space Is Rapidly Shifting

As developers try to build industrial properties that will last half a century or longer, they are increasingly thinking about how to turn warehouses into what owners and tenants will want in the future.

“What we’re telling all of our clients is you need to be cautious about that older stuff in the logistics environment, because we view the future of logistics similarly to the future of office,” Mary Lang, CBRE Investment Management’s head of Americas logistics and strategies, said at Bisnow Northeast Industrial event last week.

The office has been devalued since the pandemic-induced pivot to hybrid workforces, but the properties that are leasing are typically the newer buildings with the best amenities. Industrial will likely face similar conditions in the future, as changing demands for parking, energy and environmental impact draw potential tenants away from older product, Lang said at the event, held at Innovo Property Group’s 2505 Bruckner Boulevard warehouse in the Bronx.

“That could spell trouble for what has been one of the most resilient commercial real estate asset classes: 82% of all logistics facilities in the U.S. today were built before 2000,” Lang said. “The way these occupiers are utilizing facilities today are extraordinarily different than they utilized them two decades ago. You need to have stronger floor slabs, you need to have higher clear heights, you need to have greater roof load capacity for solar installation. We need to bring more power to these facilities to run the truck loads that are coming.”

The biggest change coming for industrial and logistics facilities may not appear for a few years, but developers, architects and investors onstage said it will definitely arrive with electric vehicle production being supercharged by federal incentives and regulations. Last-mile delivery could see a particular boost, an April report from consulting firm McKinsey found, as commercial operators seek to decarbonize their businesses.

“Power is definitely the new parking,” Lang said. “The single greatest amenity going forward in the logistics environment is going to be the availability of power.”

Industrial developers are looking at how to center electric vehicles’ presence when designing spaces, changing both the physical setup for parking areas and reconfiguring power ahead of time to make sure facilities can get enough electricity to charge vehicle fleets.

Electric vehicles adoption is spreading, both among consumers and in a commercial capacity. The Inflation Reduction Act of 2022 included separate incentives for commercial electric vehicle purchases; the Associated Press reports that approximately 5% of new-vehicle sales in the U.S. are electric vehicles with a federal tax credit expected to push that number higher.

California recently passed legislation banning the purchase of gasoline-powered vehicles in the state after 2035, with New York following suit last fall. And where New York goes, “New Jersey, Maryland, Connecticut, Massachusetts follow,” Lang said — meaning developers have to anticipate where future regulation is going long before it takes effect.

“None of us on this stage can call any public utility in the United States and say, ‘Bring us another 4,000 amps of power into our building’ next week or the month thereafter,” Lang said. “We’ll get laughed out of the room.”

CBRE Investment Management, which has nearly $150B of real estate assets under management, is investing with the premise that owners should seek to maximize on-site charging capacities for electric vehicle fleets beyond predicted tenant needs, expecting demand for stations to be high enough to rent out to on-the-go vehicles.

“In some of those industrial outdoor storage locations, you could actually put EV charging on-site for other operators, because you have so much parking,” Lang said. “You might start to see IOS used a lot differently on portions of the site. It’s almost like a hoteling concept as it relates to charging for those drivers around the region who are looking for a charge.”

Although the moment where every warehouse or industrial space will be serviced by renewable power sources and electric vehicle fleets may seem distant, ARCO Design/Build Vice President Jim Wyatt predicted that the technology will likely appear faster than expected.

“I always talk about the high-definition TV — early 2000s, big bulky TV, really expensive. Today, we have a 4K TV, which is ready to hang on the wall,” Wyatt said. “A major increase in technology over a 20-year span of the high-definition TV. The same thing is happening with a lot of these mechanical systems that are driving these major manufacturing facilities: The technology is increasing very quickly.”

Placing solar on industrial rooftops is one area where change could happen swiftly if political action comes into play.

Overall, just 3% of commercial and industrial rooftops in the U.S. are covered with solar panels, Solar Landscape President Mark Schottinger said, and Wyatt pointed to legislative action spurring adoption in individual states.

“There’s certain mandates depending on the state, like New Jersey is making baby steps with the requirement for 40% of the roofs to be solar-ready for industrial projects,” Schottinger said.

As publicly traded companies think about future needs, many are paying more attention to their emissions and carbon footprints, JLL Vice President for the Northeast Industrial Region Rob Kossar said. Developers choosing green measures aren’t necessarily doing it all for government incentives, he said, but also because they are eager to comply with future tenant demands.

“It’s less about the economic aspect of solar,” Kossar said. “I think it’s more about what’s coming in terms with occupiers’ desire for ESG.”

But most developers, owners and investors aren’t looking at solar as they think about what will attract tenants, said Innovo Property Group CEO Andrew Chung, who has developed some of the most advanced warehouses in New York.

“Solar is the tail wagging the dog currently. It’s not a lot of money currently,” Chung said. “If it’s about ESG, EV is the big element, and solar is a minor aspect.”

Source: Bisnow