'Monstrous' and 'behemoth' are words being used to describe the growth in the industrial real estate sector along the Wasatch Front
By Kyle Roberts & Luke Burbank
When it comes to industrial real estate in Utah, most residents are unaware of the huge amount of activity in this vital real estate sector. While retail, office and multi-family are types of commercial real estate that are typically more visible to the average Utahn, industrial is more abstract for most people to understand.
People often associate industrial real estate with images of smoke stacks and factory assembly lines rather than highly automated warehouses stocking consumer goods or clean rooms where the next generation of medical device is being constructed. Major industrial development is usually located farther away from residential areas. This is due to zoning regulations and by necessity, the proximity to transportation hubs like inland ports, airports and rail. By default, fewer people are aware of some of these large projects currently underway in their very own backyards.
However, given changes in consumer behavior over the past decade — particularly with regard to e-commerce and direct-to-consumer retail — the way in which people understand and view warehouses is changing in a way not seen since the advent of the “warehouse retailer” model pioneered by Costco almost 30 years ago.
What is Happening
The “supply chain,” the process by which a product gets manufactured and ends up in the hands of a consumer, is changing at a rate of speed never before encountered in human history. Fueled by technology and innovation, the rate at which efficiency gaps are being closed is helping consumers save cost while providing for a “leaner” system of inventory management.
These changes ultimately require modifications to existing inventory management systems as well as transportation paradigms built around how people consume things today. These drivers create needs for space based on what users forecast their demands will be tomorrow. One challenge facing supply chain managers is the general requirement that longer-term leases are signed to help reduce cost while the environment they are operating in is one of the most dynamic segments of the economy.
One way users mitigate the risk of signing a long-term lease and landlocking their own expansion is by utilization of interior ceiling clearance or “clear-height.” Most “big-box” speculative industrial buildings constructed today are built to minimum clear heights of 32 feet, with next-generation warehouses being built to minimum 36 feet or taller. Though a majority of users in the market do not utilize all of the available clear height in a space due to material handling costs, as companies grow, balance sheets expand and space gets tight, “going up” versus “going out” often presents a much better business case. This is especially true as technology makes warehouse management systems and utilization of “cube-footage” more scalable.
Is this happening in Utah? Absolutely.
And we believe it is only trending upward. The accompanying graphics document the industrial building activity along the Wasatch Front. Previous to the 5.6 million square feet currently under construction, the Wasatch Front delivered almost 7 million square feet of new buildings in 2017 alone.
Capital Markets Continue to Fuel Construction
One of the most important factors driving and sustaining construction and financing is the overabundance of institutional investment capital for debt and equity placement. Having an exit strategy that is both optional, and not under circumstances of duress, comforts developers and their capital sources.
The Wasatch Front industrial market, and in particular Salt Lake and Utah counties, have “institutionalized” in the sense that the Salt Lake County market is widely regarded as a Tier 2 market and Utah County as an emerging Tier 2 market among investors seeking to place capital. Velocity of trades is at an all-time high and values continue to increase as yield-hungry investors seek better returns than those found in Tier 1 or “gateway” markets.
Where Does Utah Fit In?
Utah, and particularly the Wasatch Front, has a unique convergence of attributes which have contributed to making it one of the most stable, diverse and sustainable economies in the country. A highly educated workforce, proximity to natural resources, location of strategic military installations, renowned research facilities near population and a competitive regulatory environment are key ingredients to Utah’s ever-growing manufacturing sector. Whether it be carbon fiber and composites, life sciences, engineering or aerospace, Utah continues to deliver a steady supply of highly qualified and eager workers.
Utah’s central location in the western United States provides access and delivery opportunity to all major western population centers. The existing rail infrastructure and an expanding airport provide multiple transportation modes to facilitate efficient movement of freight. Recent business and political traction for a world-class multi-modal inland port creates hope for yet another generational economic engine that could further distinguish Utah as a world-class distribution hub. If local roadway and infrastructure investment can keep up with industry demand, indeed, these factors predict a bright future for Utah’s distribution economy.
Kyle Roberts is co-founder of Newmark Grubb ACRES and an executive managing director. Luke Burbank is a principal and also an executive managing director with Newmark Grubb ACRES.