Fresh off his “tour” as global president of the Society of Industrial and Office Realtors (SIOR), Geoffrey Kasselman has been named as a panelist for one of the general sessions at the 16th Annual Commercial Real Estate Forecast Conference on Wednesday, January 17. In a preview of what are likely topics for that panel—E-Commerce: Fight It or Flaunt It—Kasselman, executive managing director, Newmark Knight Frank, answers a series of questions.
Rejournals: What is the most positive influence of e-commerce on your specific real estate sector? (And can it get any better?)
Kasselman: In the same sense that the “cloud” drives bricks and mortar data centers, “e-commerce” drives bricks and mortar industrial real estate. So e-commerce is a core driver of industrial real estate activity.
Interestingly, all facets of industrial real estate in nearly every market around the world are simultaneous beneficiaries of this phenomenon, including but not limited to, port and intermodal properties; truck terminals and fleet maintenance facilities; air cargo/air freight facilities; “mega-warehouses” (500,000+ square feet) in suburban and rural areas and smaller, “last mile” facilities in urban areas. Based on current and anticipated supply/demand dynamics, there appears to be some run-time here such that the industrial sector, already red hot, could still get marginally better in the near term.
Rejournals: What is the most negative influence of e-commerce on your specific real estate sector? (And can it get any worse?)
Kasselman: The negative aspects of e-commerce on industrial depends on one’s perspective. For users it might mean limited supply alternatives, increased rent and overall operating expenses, and some amount of inherent or anticipated functional obsolescence even in the newest industrial facilities which are not being designed with the tech-driven physical disruption in mind that will occur in the next three to five years. Thus a 10-year lease starting now is a potential mismatch.
For developers it might mean increased competition for developable land and pressure to expedite the entitlements process to meet current market demand in a timely fashion. For brokers and property managers, it might mean fewer agencies or assignments, increased competitive pressure to reduce fees, and reduced income as a result.
Also, true e-commerce activity drives employment, so there is a notable, growing labor shortage in most desirable locations, which in turn is putting upward pressure on wage rates and on-site employee amenities as employers compete for workers.
Rejournals: What adjustments must real estate owners/users make in order to harness the explosive growth of e-commerce?
Kasselman: Owners must better understand and position themselves to deliver speed, precision, future-proofing design changes, operating infrastructure redundancy, increased term flexibility, and labor force dynamics (quantity and quality). Users also must mitigate competitive pressure and supply/demand dynamics with enhanced, expedited analytics and decision-making, and also adapt a TCO (total cost of occupancy) model where lowest rent may not get you the best overall economic deal. Both stakeholders must employ extreme creativity in deal-making with an understanding that accurate, reliable data is readily available to both sides, enhancing transparency. Also, in today’s accelerating exponential environment, past results are no longer an accurate predictor model of future success.
Rejournals: In your opinion, is Chicago on the Amazon short list of cities or not? Is that a good thing or not?
Kasselman: Chicago is certainly on Amazon’s short list. Our market offers them more than a dozen different legitimate and exciting real estate opportunities; we have a legitimate global connector in O’Hare; our overall cost of living is much less than most East Coast cities (and our quality of living is higher); we have a strong tech community here and we have so many fine universities and colleges feeding “knowledge workers” into the local work force while Chicago acts as a magnet for similar workers coming here from around the Midwest. Chicago meets all of Amazon’s stated criteria.
Getting the HQ2 would be a mixed bag for sure. Wage rates and housing markets would change drastically overnight, and increased taxes could result to help pay for all of the new transportation infrastructure that would be needed to support such a large operation. It could also deter other would-be headquarters from moving to Chicago out of fear or a lack of desire to compete with Amazon. So be careful what you wish for!