Home > Infrastructure > Expert Contributor

Strategic Paradigm Shift Impacts Industrial Real Estate

By Salomon Noble - Intermex
CEO

STORY INLINE POST

By Salomon Noble | CEO - Wed, 09/28/2022 - 13:00

share it

We are facing a very disruptive global environment. From the macroeconomic to the geopolitical realm, profound technological changes, shifting consumer dynamics, and  climate change are all converging in a concoction of forces that create great uncertainty and increasingly  complex challenges, heralding a new order of things: A paradigm shift in strategic sourcing that is and will continue to affect the industrial and logistics real estate market. 

From a holistic standpoint, identifying the key drivers of these disruptive forces and their interrelationships is fundamental for an industrial and real estate strategist attempting to model the new order and seize the opportunities it is already creating. Here are examples of these game-changing trends:

  1. From Global (Offshoring) to Regional (Near/Friendly Shoring) Strategic Sourcing. In 2007, Thomas Friedman published his  bestseller, “The World Is Flat 3.0,” arguing for a level playing field where all countries and its supply chain players compete on an equal basis, except labor, hence justifying the manufacturing offshoring trend that defined the prevalent strategic sourcing approach of the prior 30 years. Today, the pendulum has oscillated to the opposite extreme in a renewed sourcing effort to redeploy the supply chain closer to trade partners/friends (near/friendly shoring) as a consequence of the geopolitical tensions among hegemonic blocs, COVID-19, climate, labor and materials shortages, freight/port delays, and dramatically increased overseas cost complexities (prices have more than doubled). No corporation can rely on one sourcing strategy alone, far or near, as an absolute. The new dual strategy, and a more expensive one in its inception, will be a combination of both, as a function of the competitive and comparative advantages each one has to offer. Industrial and logistics real estate is and will continue to observe progressively increasing numbers of manufacturing and logistics operations, relocating and expanding closer to their regional customers until the risk of shortages and overseas transportation reliability and costs are effectively balanced and optimized in their supply chains. 

  2. From “Just-in-Time” to “Just-in-Case” and from “Single Source” To “Dual/Multiple Source” Inventory Management Supply Chain. In the 1970s, Japanese automakers, led by Toyota, gave the world the Just-in-Time (JIT) Inventory management system, which was at the time a radical and innovative approach to the manufacturing process, supplying parts only as and when the process required them, reducing inventories and carrying costs to a minimum. In contrast, shaped by the recent pandemic and geopolitical forces, prudent inventory management and supply chain managers have had to redefine and evolve their prior best practices into new practices that now require manufacturers to carry increased critical inventories (safety stock), especially on those items that come from single and offshore sources. Not all of it would be JIT or JIC, rather a combination. Industrial and logistics real estate is and will continue to observe progressively increasing industrial and logistics space demand to accommodate these larger inventories and dual-sourcing requirements (near/friendly shoring) until the shortages risk, perceived and real, are balanced and optimized. Additionally, with infrastructure land becoming very scarce and significantly more expensive, new industrial and logistics facilities are designed with incremental 36 plus-foot Clear Heights to maximize their “cube” for additional storage over the same footprint, super-flat floors, and cross-dock amenities. 

  3. From Traditional Retail to e-Commerce and Omnichannel. Impressive technological advances in hardware and software, communication protocols, affordable handheld intelligent devices and the massification of internet access concurrent with the mobility restrictions imposed by the pandemic provided fertile ground for e-commerce and omnichannel market penetration. Measured as a percent  of  total retail sales, the U. e-commerce market has grown from 15 percent to 25 percent over the past four years, a 13.6 percent compounded annual growth rate (CAGR) and growing. A geometric growth story applies for Mexico, from 3 percent to 12 percent over the same period, for a CAGR of 41.42 percent. Today, we have strategically located mass distribution centers (business to business, or B2B) and order fulfillment centers (business to consumers, or B2C) and, to a lesser degree, distributed last-mile operations, which had doubled logistics-driven space absorption from 10 percent to 20 percent of industrial portfolios in Mexico, over the same period. And there is still room for growth. Industrial and logistics real estate will continue to observe progressively increasing space demand for new B2B/B2C operations that facilitate an omnichannel consumer experience with logistics-related operation-ready features (see #2) and amenities like forklift charging stations, fast internet and incremental electric power requirements conducive to automation. 

  4. From Labor Intensive to Automation. With the US labor markets at full employment, labor availability is decreasing, and its associated costs rapidly increasing. On the other hand, to complicate matters further, e-commerce users continue to demand what they want faster, cheaper and better ( instant gratification). It is fascinating to observe what B2C order fulfillment operators like Amazon have been able to achieve in order to cope with the shifting paradigm of instant gratification. With a dual strategy of deep learning and predictive algorithms (AI) and robotization,  “smart” B2C order fulfillment centers are able to “anticipate” and successfully predict what customers will be ordering online so adequate inventory levels are stocked in the right place, at the right time for picking and optimized delivery.  On the operational side, multiple robots or “pods” capable of lifting up to 600kg are displacing whole racks of parcels at a 3mph speed through the super-flat floors of the warehouse to “stationary” operators who are picking and stowing these parcels from the racks and dispatching them in conveyors ready for truck loading and delivery, gaining up to 40 percent in efficiency. The automation trend in these “smart” warehouses will continue to get more sophisticated in the years to come. Industrial and logistics real estate is and will be observing increased absorption of logistics space in traditional and in nontraditional markets as the e-commerce omnichannel wave continues to deepen its penetration, and more “smart” warehouses are required, until the markets are balanced and fully served. It is interesting to observe as well how traditional good practices in warehouses, such as skylights, are not desirable in smart, automated B2C fulfillment centers, as the natural light interferes with the pods’ trajectory sensors. 

In closing, theses disruptive forces and trends are and will undoubtedly continue to reshape the industrial and lLogistics real estate markets in the future, from the incremental demand and record-high absorptions across all metro markets to the ever-changing design configuration of the newer adaptive “flex” and “smart” manufacturing and warehouse industrial space. Nevertheless, all these disruptive forces will eventually subside and the industry will reach a new balance between demand and supply, just not today. 

Photo by:   Salomon Noble

You May Like

Most popular

Newsletter