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Logistics, the commercial activity of transporting goods to customers, has progressed rapidly over the past several decades. Driven largely by online sales activity and greater demand for delivery speed to consumers, the growth of logistics has required industrial buildings to reach new levels of sophistication, providing developers with new challenges and concerns in their development.

There's no doubt logistics has had an energizing effect on the industrial sector as a whole throughout North America. According to a recent report from Cushman & Wakefield Research for the Americas, manufacturing remains a driving force of innovation, jobs and prosperity for the US, Canada and Mexico. John Morris, C&W's industrial services group leader, says, "The future of manufacturing here will depend on how well industries and governments work together to address the competitive challenges needed to 'seize the moment' and take full advantage of the trends that favor North American production." The report also says critical factors include labor costs, proximity to customer, time to market, currency volatility and transportation concerns—all of which are addressed by logistics.

Drew Hess, senior director of the investment group at American Realty Advisors, tells Real Estate Forum, "As logistics has grown, industrial real estate experts have preferred to build and buy space that caters to logistics users. While logistics tenants include large credit users and smaller local companies, these tenants have demonstrated they can pay more for space that adds value to the supply chain beyond dead storage. The growth in the sector has led to better occupancy, performance and rent growth over cycles. The risk-adjusted returns, low re-tenanting costs, and excellent liquidity have further attracted institutional interests from large core buyers, sovereign wealth funds, and industrial-focused public and private REITs."

The design and development of industrial buildings has been greatly affected by logistics. Andrew Mele, a principal at Trammell Crow Co. on the East Coast, tells Forum, "From a design standpoint, class A industrial buildings have gotten bigger, taller and far more sophisticated. Quality site design is also more important than ever, since what happens outside the building has become almost as important as what goes on inside. Ingress/egress, employee parking, trailer storage, site security and expansion capability are vital to sophisticated logistics operations."

Mele adds that many of these changes have taken place over the past two decades. "The first wave of modern supply-chain reinvention, in the 1990s, saw an emphasis on reducing costs through consolidation. Smaller facilities spread across the country were phased out and replaced with large-format, super-regional distribution centers. As demand grew and consolidation increased, these buildings continued to grow in size, making buildings larger than one million square feet common in larger consumer markets. In addition to increasing in size, these buildings were much more likely to be built with cross-dock loading design, higher ceiling heights and parking areas for trailers."

Pat Ward, founder of MetroGroup Realty Finance, relates, "A big building in the past used to be 200,000 square feet to 300,000 square feet. As a result of logistics, it is common to see buildings in the million-square-foot to 1.5-million-square-foot range."

Also, Ward adds, with these larger buildings has come great consolidation. "Companies formerly had 10 to 15 regional hubs with smaller buildings. Now they have consolidated into these larger, more sophisticated buildings in three to four hubs throughout the country."

And yet, the sector is demanding a greater variety of building sizes in order to meet its logistical concerns. Mele says, "Not long ago the number-one priority in the logistics world was cutting costs within the supply chain. While cost containment is still important, innovation is now being driven by other priorities such as greater speed to market, product customization and, above all, customer satisfaction. Without a doubt, this innovation has been led by the growth of e-commerce and online retail."

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The result, he adds, will be "demand for a variety of industrial product types as users conclude that one building cannot solve all of their logistics requirements. At one time, consolidation was the goal, but those days are over. Big-box distribution centers, midsized fulfilment/sortation centers and smaller local service centers are all required for a well-coordinated distribution network."

Mele points out that the emergence of e-commerce and online retail has led to the latest-generation buildings having even higher ceiling heights and more available space for car parking to accommodate the larger labor force required by these operations. "Whereas once containment was the highest priority, speed to market, product customization and customer satisfaction are critical to the success of e-commerce retailers. As a result, we will likely see the return of smaller buildings playing a role in the supply chain for sophisticated users as they conclude that one building cannot solve all of their logistics goals."

Logistics has also definitely increased the focus of industrial development on flexibility, Adam Mullen, managing director of CBRE, tells Forum. "Oftentimes, facilities are customized inside the four walls to support business requirements. If spec, the more flexible the better—higher clear heights, ability to handle high-power requirements and column spacing to support racking and automation."

Other business requirements, including extreme optics around location, have arisen due to logistics needs, Mullen adds. "Proximity to major hubs, ports and population centers, and the majority of supply-chain and logistics costs are freight/transportation related. If a development locates in a sub-optimal location relative to transportation, it may not be as marketable. The perfect location delivers low freight costs, great labor, the best incentives, proximity to as many people as possible, competitive real estate costs and so on. Developers know you can't have all of it and should be keenly aware of the various trade-offs and how they impact their project."

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The landscape for identifying ideal buildable sites for industrial properties is growing increasingly competitive, says Marc Lebovitz, principal of Woodmont Industrial Partners. "At the end of the day, the location of the building and its accessibility to the ports are perhaps the most important factors that are influencing developers. While there's no one-size-fits-all answer to any of this, location is one aspect that allows logistics companies to achieve success both domestically and internationally."

Nick Kim, managing director at Transwestern, tells Forum that as technology is evolving, retailers and global companies are also changing with the times. "Developers are building larger distribution centers—some might call them 'mega hubs'—to reduce the delivery time, while clear ceiling heights are also rising. In addition, the spacing between the columns is also widening as truck courts are becoming longer." He adds that developers are also working with state and local economies (e.g., Atlanta and Savannah, GA), to ensure that infrastructure improvements, especially transportation (roads, rails and bridges) are being addressed, since locating near ports and rail lines has become more essential than ever.

As logistics has grown, the fundamentals that have always driven activity in the industrial real estate sector—location, functionality of properties and accessibility—are becoming more important than ever, says Lebovitz. "Seventy cents of every dollar is being spent on transportation, so the accessibility and location of industrial properties is just as important as the structure and configuration of the buildings."

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Naturally, e-commerce has created an even stronger demand for state-of-the-art logistically sophisticated industrial buildings and the labor force within them. "E-commerce and specialized users are increasingly looking for space and functionality that will meet their needs now and into the future," says Lebovitz. "Looking ahead to the third and fourth quarters, seasonal labor in anticipation for the holidays will be a huge factor as many companies increase their staff to be able to keep up with high levels of activity that are anticipated."

Kim says there has been a shift in industrial from West Coast to East Coast. "Shipping shifts and an increase in cargo volume have spurred a continued increase in leasing velocity, making improvements in transportation imperative, especially for when the Panama Canal expansion is completed in 2016. 3PL companies continue to bid for the same scarce space options, and some are being priced out."

Jeremy Garner, a principal with Trammell Crow Co.  in the central US, tells Forum, "As we enter the 'new Panamax' era for container ships, many ports now have to invest significant capital into dredging, larger cranes, rail and other infrastructure necessary to handle such large vessels. The challenge is compounded by the sheer amount of cargo to be offloaded from these larger vessels and sent on the next leg of their journey. There is an existing shortage of truck drivers in many areas of the country, and this shortage is expected to grow in coming years." With the Panama Canal expansion wrapping up next year and improved infrastructure at many East Coast and Gulf Coast ports, Garner says he anticipates companies will increase the amount of goods imported via ports, nearer the product's ultimate destination, thus increasing demand for warehouse space in those markets while reducing the amount of time product spends on the road.

Kim says that e-commerce is likely to continue as the catalyst for the changing industrial sector. "Major retailers are considering reducing the size of stores, choosing instead to offer showrooms with limited merchandise while keeping inventory in warehouses. As e-commerce continues to be the market driver and online orders grow at an accelerated pace, trucks need to maneuver in and out of warehouses quickly in order to make deliveries on time. New Jersey's warehouses offer more land than urban areas to accommodate better truck maneuverability and trailer/container storage. Location near the ports is also of even more importance, saving time for the transport."

Of course, industrial real estate has evolved with the ever-changing demand of the supply chain. Mullen says, "Wall Street has its eye on how companies leverage their supply chain, and therefore how companies leverage industrial real estate—and most companies nowadays have at least thought about transforming their supply chain to keep up."

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According to Garner, companies, particularly importers, are focused not only on increasing supply-chain efficiency, but also supply-chain diversification. "West Coast labor disruptions and shifting populations have influenced importers to take a hard look at their supply chains. This has led many companies to import products via multiple markets, often through ports and airports that are situated closer to the product's final destination. The efficiency of transporting goods via intermodal containers—and the resulting increase in goods flowing through the supply chain—has caused tenant demand for additional trailer parking, truck-queuing lanes, higher clear heights and bigger buildings, as well as the emergence of inland ports and intermodal centers."

Ward says his firm is starting to see the rise of inland-ports cities such as Chicago, Memphis and Kansas City becoming larger distribution centers receiving goods by rail from the ports. "This is a result of rail being more economical to ship the goods. We see material handling innovations within the buildings improving. Robotics and more-sophisticated conveyor systems are changing the way we handle goods."

Mele says a significant change has been the industrial sector's arrival as a preferred asset class. "Institutional investors, foreign and domestic, have identified industrial as a project type of choice. It is not an overstatement to say that developers are currently enjoying the most exciting period of growth and innovation ever experienced in industrial real estate."

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Mullen says that while industrial use has come a long way, it is still behind compared to the other tenants of a company's supply chain: inventory decisions, process, automation and communication with consumers that all move at the speed of light. "Industrial space could be argued as the most important part of the supply chain—home base. We have to apply the same thinking in our industry and innovate."

According to Hess, with the emphasis on logistics, small-user buildings, light manufacturing, incubators, and service-center buildings are not getting developed at the same pace as larger warehouse distribution and logistics centers. "As the population grows but the supply stays the same, this imbalance could potentially create a favorable dynamic for those investing in smaller-tenant industrial."

Land is another ever-present concern. Ward says, "We think the greatest challenge to the industrial real estate sector is the availability of land to build these larger buildings. Large logistics buildings are getting pushed farther away from the population centers in search of lower land prices."

He adds that rising occupancy costs are creating other challenges for the industrial-development sector. "Higher cost of land coupled with municipal building codes are driving up the cost to build buildings today." However, since users are keenly aware of their occupancy costs as a percentage of revenue, they are using their facilities more wisely and efficiently, says Ward.

The rising cost of labor and a highly competitive marketplace are two challenges Lebovitz believes will have a long-term impact on the industry. "Employee turnover is also a huge concern. You can have the best industrial building in the most strategic location, but if you don't have a consistent and reliable staff in place, you can run into serious problems."

With the growth of logistics, Lebovitz says he anticipates many firms will become much more cost-conscious and will continue to invest heavily in technology that will help drive costs and inefficiencies out of the supply chain. "Technology, along with a sustainable labor force, will allow many companies to cope with the 'peaks and valleys' (busy and slow periods) that are inherent within the industrial sector."

Kim adds, "Redevelopment is an opportunity, but the process needs to be sped up with fewer obstacles. There's also a transportation budget crisis, and bridges and roads are in desperate need of repair."