Industrial assets - velocity of obsolescence

This is coming from someone early (5 years) into career & not as familiar with industrial. My question is somewhat technology related and focuses on the warehouse & supply chain product.  For industrial focused folks, obviously there's new building spec needs for the current users of warehouses that have changed overall during the last 15 years (higher clear heights, column spacing, etc) to create a better utilized space.

Do you think we've hit the ceiling in terms of what's needed in a warehouse today will be reliable for the next 10-15 years, or is there a continuing transition in either technology or how the spaces will fit into supply chain strategy (whether anecdotally, real or speculative) that could make even newly built products today less desirable or inferior in say 5 years?

Comments (21)

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Nov 30, 2021 - 2:36pm

 Since nobody has responded, I'll give it a go.   There are a fuck load of factors that go into industrial building specs and why they are the way that they are.  Standardized pallet sizes, limitations of material handling equipment, size of semi-trucks, capacity/limitations of fire suppression systems, size of concrete tilt wall panel, distance between docks on center, among others, are all inputs that dictate industrial building specs.  I find it funny that there are so many industrial real estate "experts" out there that regurgitate the optimal building specs without asking why they are that way.

To summarize my opinion, while industrial space can face obsolesce, there are factors, such as location and tenant need, that dictate whether a space is useful or not.  Well located and relatively functional B product is one of the best performing asset classes in the world right now.

 

Truck Courts

130' truck courts aren't going anywhere.  The standard is set by the size of needed to optimal maneuver a 73-foot long semi-truck to docks that are 13' on center in the worst case scenario (optimal distance between doors on a tilt wall panel - 2 docks per panel).  Wider spacing of doors allows for less truck court.  For example, if doors at 17'4" on center then the truck court can be 124'.  I guess that this could change if some how the turning radius of trucks improved (independently controlled axles?).

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Column Spacing

Column spacing and clear height is largely dictated by three factors - structural design, limitations of material handling equipment, and limitations of fire suppression/fire code.  Modern material handling equipment (aka Swing Reach Trucks/Turret Trucks/Order Pickers) can go up to 50' and need at the absolute minimum aisles of 4.5'.  Most the time you want to design for 104"-118" aisles depending on your clear height.  The higher you go the wider the aisles will need to be for the material handling equipment to go up that high.  The math dictates that column spacing should be 52' - 56' depending on the desired clear height.  Keep in mind that measurement is for the length of the bay spacing that runs perpendicular to the dock face of the building.  Lastly, you want a 60' speed bay (which is the first bay along the dock).  Tenants use the speed bay for staging and packing.  They need a bit more space there to work.

This could be subject to change as material handling equipment improves, but for now, 50' x 52' to 56' appears to be here to stay.

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Clear Height

Clear heights very well may increase, but as it stands currently, very few tenants need 36' clear and even less need 40' clear.  Additionally, we are running up on fire code limitations.  For the foreseeable future, 40' will continue to be the max and I don't see a reason to begin to design higher.

Racked storage arrangements are regulated by the fire code under a section called "high-piled storage".  These regulations create a metric to identify maximum cost-efficient ceiling heights.  Clear height is also a measure of the number of rack levels a building can contain and also a measure of how it can meet the fire code for high-piled storage using an ESFR fire suppression system.  Almost all modern industrial buildings utilize ESFR (Early Suppress Fast Response).  In the recent past, ESFR systems have been limited to maximum ceiling heights of 45' with a maximum storage height of 40'.  That arrangement led to today's standard of 36' clear (and 40' clear with special roof designs).  There are some cutting edge sprinkler heads that Viking has created that will allow ceiling deck heights of 50'-55', but that is a ways off as there are other issues limiting racking up to that height (racking equipment and material handling equipment).

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Optimal clear height is also dictated by pallet height.  There are three common pallet heights in the USA - 56", 64", and 72".  36' clear heights are only superior to 32' clear heights if a tenant utilized 64" or 72" pallets.

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Nov 30, 2021 - 3:28pm

Definitely a lot came from there - that book definitely lays it out the best.  Our architect was on the editorial board for that book and has given me a lot of educating on the topic as well.  Just went through the mental exercise as to whether the extra couple bucks psf was worth it to go to 40' clear.  Decided that the tenant demand isn't there yet to monetize the extra cost (at least in that specific market).

Dec 5, 2021 - 3:22pm

do you have any insight on the typical terms of an amazon distribution center deal? If they dont own their warehouses and the developer owns the land, what incentive does the developer have leasing to amazon if a 1m+ SF facility only pertains to Amazon? is 20 year lease the minimum? does the land owner lease the land out to amazon? is there any JV creative structures you've heard about?

Dec 5, 2021 - 5:02pm

A lot of Amazon-leased warehouses are not built out in a way that makes them irreparably obsolescent and incapable of facilitating future general warehouse uses. The easiest way to ensure this is that a lot of the leases will just include a restoration clause which would force Amazon to remove buildout which might not have residual value for other tenants (I.e. remove mezzanine space Amazon has to in its fulfillment facilities).

I think the more challenging issue at hand is determining how to value these buildings on the buy - groups have been acquiring Amazon leased facilities with above-market in-place rents at market cap rates. Amazon often has developers / landlords foot the bill of their above-market TI packages and just capitalize the above-market costs into the lease rate. If Amazon blows out at lease expiration, the odds of being able to relet the space at Amazon rates is tough to do. A lot of investors might find themselves at lease expiration holding the bag of a high-basis in an asset trying to backfill the space at a rental rate 25% lower than where you had Amazon.

Dec 1, 2021 - 7:16pm

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