According to an expert, global supply management is very dynamic, and is what makes the commercial real estate industry exciting.
Richard Prokup is senior vice president of operations at First Industrial Realty Trust, an owner and operator of approximately 66 million square feet across the nation’s top markets. The company serves a wide variety of tenants from big to small, and everything in between, which gives them a unique window into how businesses operate and make their industrial real estate decisions.
“What we’ve found is that there is no “one size fits all” approach,” Prokup said. “We’re constantly seeing tenants expanding, consolidating and reconfiguring. We need to be able to accommodate a range of customers because the market’s not just driven by the big Amazon-type users. Most real estate is really smaller companies serving local customers.”
Prokup said from First Industrial’s perspective, one of the biggest factors that have been influencing the reconfiguration taking place over the last couple years is growth.
“The US GDP has grown 12 out of the last 13 quarters,” he said. “As growth takes place, it pushes demand. So what’s happened is that we’ve seen positive net absorption in the United States for the last 16 consecutive quarters.”
Due to this positive absorption, Prokup said, the market’s starting to see space become tighter, driving rents in a positive direction and requiring tenants to make decisions more quickly while looking ahead to their long-term needs. As a result of this absorption and improving rental rate picture, the market has seen more speculative construction, as well as build-to-suit developments.
“Most real estate is leased to smaller users,” he continued. “With those smaller users, the change has really been in confidence. As the U.S. economy has gotten better, their confidence has increased. Early on in the economic recovery, they saw things getting better but were unwilling to believe in it and sign long-term leases. So we saw a lot of shorter term leases taking place.”
Now that’s changed, as Prokup says they’re starting to see smaller users implementing some of the same models, consolidating, and taking on more permanent space in larger, more efficient buildings.
“It’s increasingly sophisticated if you’re going to relocate a distribution center—there’s a lot you have to look at. The cost of the real estate is one thing, but in the scheme of things, that’s usually a relatively insignificant cost.”
Due to that, according to Prokup, these companies have to focus on an array of factors. “Will they be using rail? What’s the labor like in that particular market? What are the economic incentives?”
He points out that another significant trend has been the growth within e-commerce, which has contributed greatly to the net absorption of industrial space.
“In 2013, e-commerce was about 6% of total retail sales. It is about 9% this year, and it’s predicted to be about 11% next year. E-commerce users employ multifaceted logistic operations, often centered around large distribution centers using a hub and spoke model.”
The classic example is Amazon, according to Prokup, as they have popped up with a building 1 million square-foot or bigger in almost every major market in the United States. “The idea is for them to be able to distribute very quickly into the local markets, in order to be able to compete with the retail stores where someone can just walk in, buy the product, and walk out of the door. Amazon will always be the first to be mentioned because nobody has been as prolific as them relative to absorbing space, and pushing the envelope in regards to logistics.”
Prokup said traditional retailers are seeking ways to respond to competition from Amazon and other internet retailers.
He continued, “Some of the other retailers have both e-commerce and physical stores. In addition to being points of sale, they can also use these stores as warehouses. So the world is different. You can go into a store, and if they don’t have what you’re looking for, they can have it delivered to your door within a couple of days.”
The product could be coming from a warehouse, a local store, or a store from another state, but the key, Prokup noted, is getting it there fast.
“It’s all about how they can make the sale by getting the goods to the customers as quickly as possible. The supply chain dynamic has changed, and it all depends on the type of user and what they’re trying to deliver.”