What the Nation’s Top Industrial Developers and an Economist See Ahead

I returned from New York City last week, where commercial real estate professionals from across the country gathered to celebrate the 85th anniversary of the Society of Industrial and Office Realtors, commonly known as SIOR.
 
As promised, I wanted to share several observations from the conference that I believe will influence commercial real estate decisions over the coming months.
 
One particularly interesting discussion featured executives from three prominent industrial developers, Prologis, Becknell Industrial and Panattoni Development Company. Their perspectives revealed how dramatically the requirements for industrial buildings have changed.
 
For decades, industrial developers concentrated on relatively straightforward considerations. Location, access to freeways, proximity to labor and the cost of construction largely determined whether a project made economic sense.
 
Those considerations remain important, but another has emerged as increasingly critical. Electricity.
 
Advanced manufacturing, artificial intelligence and automation require enormous amounts of power. Consequently, developers are evaluating electrical infrastructure long before deciding whether to purchase land or construct a building.
 
One panelist observed that prospective occupants increasingly demand substantial electrical capacity even when they cannot yet quantify their requirements.
 
Another described how industrial buildings are evolving from simple structures used to manufacture or distribute products into sophisticated infrastructure supporting increasingly complex operations.
 
Consider the implications for Southern California.
 
Our region possesses an extraordinary concentration of aerospace, defense, medical device and advanced manufacturing companies. These businesses frequently require specialized electrical systems, reinforced floors, sophisticated automation and highly trained employees.
 
Finding a building with adequate square footage is no longer sufficient. Finding one capable of accommodating these requirements can be considerably more challenging.
 
The developers also discussed the growing importance of build-to-suit projects, particularly for manufacturers whose operations require extensive customization.
 
Interestingly, they acknowledged that companies investing millions in specialized improvements frequently prefer owning their facilities rather than leasing them. Developers appear increasingly willing to accommodate that preference.
 
Another recurring theme involved the difficulty of obtaining development approvals.
 
California received considerable attention for its lengthy entitlement process, although New Jersey was mentioned as another particularly challenging market.
 
Developers emphasized that land without approvals, adequate utilities or a realistic construction timetable can represent considerably more risk than its asking price suggests.
 
For property owners contemplating a sale, understanding these obstacles before marketing land becomes essential.
 
Perhaps the most anticipated presentation came from Mark Zandi, chief economist at Moody’s Analytics.
 
Zandi characterized the national economy as growing, but fragile.
 
He described two powerful forces pulling in opposite directions. Tariffs, immigration restrictions, inflation and geopolitical uncertainty are restraining economic activity, while artificial intelligence investment is providing a substantial counterweight.
 
His expectation is for approximately 2% economic growth through 2027, provided inflationary pressures ease and energy prices moderate.
 
Of particular interest was his assessment of commercial real estate values.
 
Zandi believes commercial property prices have already undergone much of the correction necessary to reflect higher borrowing costs. Assuming longer-term interest rates retreat toward his expectations, he sees commercial real estate as relatively attractive compared with stocks and bonds.
 
That assessment was encouraging, although hardly a guarantee.
 
My takeaway?
 
The next generation of industrial real estate decisions will require considerably more preparation than simply comparing available buildings and negotiating rental rates.
 
Electrical capacity, workforce availability, automation, construction costs, financing and governmental approvals are becoming inseparable from the real estate itself.
 
For Southern California manufacturers, distributors and property owners, understanding these considerations early may determine whether an opportunity becomes a successful transaction or an expensive missed opportunity.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.