Before the end of the next 10-year lease term ends, the industrial world as we know it will be forever different. The rapid advancement and adoption of robotics and AI is causing everything we know to be reinvented again and again within that time frame. Now is the time to prepare for those changes.
Industrial sector owners, occupiers, developers, investors, and all the brokerage professionals serving those interests, are wise to understand what these new tech-fueled instruments are and where they fit into a modern industrial facility environment. A sound starting point is to understand that to thrive in 2030, which is only a few years away, companies must be already ahead of the curve so when customers arrive at the warehouse or factory, they find professionals and properties capable of navigating the future with them.
The conversation about the future of industrial, robotics, and AI, must start by factoring in two key elements into that process: digital entitlement and digital alignment. There will be those entering positions of leadership within a business who only know a digital world, thus will be seeking to grow their business through the only path they know and trust, a modern, advanced and tech-connected facility. The Gen Z demographic cohort fits this category. As these business leaders become the primary decision makers and primary spenders, it will usher in an era of digital alignment. This will also simultaneously be occurring across sectors such as the government, our lawmakers, and other aspects of society in the coming 15 to 30 years. “In order to thrive in 2030, those in the commercial real estate industry better already be ahead of the curve. That means adopting new approaches and bringing a new set of tools to the table in just six or seven years from now,” said Geoffrey M. Kasselman, SIOR, LEED AP, CEO of Evoke Partners, and SIOR Past-President, who points out that will arrive before the end of a 10-year deal signed today.
Robotics and AI both involve technology, yet they aren’t automatically paired together in the same sentence. Robotics are one facet of an overall technology plan for an industrial facility. But there are multiple facets to consider, and AI can touch every one of them. That elevates AI to a higher order of significance within the industrial setting.
Neither one is worth investing in without the proper infrastructure to support these advances. “There’s no robotics or AI without the ability to power and manage data securely,” says Kasselman, who notes a ChatGPT search uses 17 times more power to generate its results than an old-fashioned Google search. The foundation of an infrastructure platform is robust power, generally considered electricity rather than natural gas. There is a fast-emerging environment in which the electrification of everything is advancing. This electric trend is highlighting the shortage of power that is coming to light [no pun intended] because businesses are starting to realize the shortcomings of a reliable way to power an electric car or long-haul truck for a cross-country trip. To operate a fleet of robots in a facility requires significantly more power, as well as redundancy, or it will render the CapEx investment useless if the robots were unable to be recharged to complete the tasks they were designed to do.
“Imagine buildings with robotics, automation, AI and connectivity to everything with quantum caliber computing power driving it all forward. With the proper energy infrastructure, that is a profound testament to what can be possible in tomorrow’s industrial facilities.”
~ Geoffrey Kasselman, SIOR
Infrastructure is often and easily overlooked, notes Kasselman, a digital and sustainable real estate strategist and business futurist. Even before the first order for a robot is placed, a facility developer or owner must be laying the foundation of power, including both primary, and secondary sources. That encompasses considering the cost, availability, and expandability of power to ensure the facility can operate at full capacity well into the future. Developers and companies operating a facility are not solving for just one robot either. They must factor the logistical deployment and the operations across 100’s of buildings, each with 50 or more robots. That is the level and scale at which real change can be realized and will generate the ROI to convince them it is worth making the investment in the first place. When paired with a more complete deployment of 5G and better connectivity that is on the way, improved data throughput will be possible, resulting in a world of exponentially greater Internet of Things (IoT). Robotics and automation on those networks will be a natural extension of IoT leading to the completion of tasks that had previously been done manually. Adding an overlay of AI to such robotics will allow companies to outperform others in the market by a colossal extent. The data that is collected and analyzed will drive improvements quickly across an organization, whether that be from the first smart warehouse to the second to the 10th to the 100th.
“Quantum computing is the answer. That’s the next paradigm,” says Kasselman. “Imagine buildings with robotics, automation, AI and connectivity to everything with quantum caliber computing power driving it all forward. With the proper energy infrastructure, that is a profound testament to what can be possible in tomorrow’s industrial facilities.”
The job of preparing an industrial facility for this new IoT AI world will need to shift to a more collaborative process, rather than relying on traditional methods that were more siloed. Understanding the user’s needs is critical during the design process, whether that be redundant electrical service, multiple fiber feeds, a well-designed facility or finding out if EV truck chargers are needed on-site or where solar panels or microgrid infrastructure should be installed to accommodate future power needs. If any one of those elements are off or built wrong, it could cause a user to elect not to occupy a building because the cost to rectify the problem was too significant or to undo everything the developer added was too time consuming.
Developers must work with architects, users, and utility providers to produce the best modern facility that meets each party’s needs. Clearly, developers must also weigh their objectives and investment strategies whether that be a long-term hold approach or one focused on building, leasing, stabilizing and exiting in 18 to 24 months. Taking such a short-term investment approach often precludes the additional investment in the requisite technology and infrastructure, resulting in continuing to construct industrial facilities of yesteryear, and thus by avoiding such perceived risks, they are actually taking greater risk. Yet, those who do could discover new opportunities could quickly carry them into future success and evolved investment models.
A catalyst for change in the industrial sector will come when younger and digital native decision makers find their way into roles at development companies and capital providers who fund industrial developments. Today’s Boomer generation largely agrees that a technological transformation has arrived, but it isn’t yet disruptive enough or embraced as an emergent best practice. Thus, they are essentially diminishing its value and importance to their business practices today, believing future company leaders will see the vision and adopt a tech-forward mission toward building an advanced modern industrial facility.
“It will require a developer to say, ‘I’m going to go build a spaceship when everybody else is still building a horse buggy,’” says Kasselman. “The entire process today – from development, entitlements, financing, leasing and operations – is built around a model that works but for a different type of industrial facility. The features and benefits of a tech- and power-centric industrial facility are different. The rental model of a new tech-first facility may also be different, so much so that it could revert to a gross lease structure rather than typical net leases.”
That could allow a developer to capture more of the upside from the end user, depending on the mechanism to recoup a disproportionately large upfront capital investment in infrastructure. That could involve license fees or shared revenue that is captured via new revenue streams. It could also involve the provision of energy.
This new type of industrial model could also create a market for shorter leases. Rather than 10-year deals, this “spaceship” industrial project could get a better cap rate and withstand market changes and disruption over time, thus proving to be more dynamic and thus profitable than a facility locked into a long-term lease and in an evolved workplace culture where many employees can and will work remotely. Long-term deals may make good business sense for some, but for those with a long-term hold strategy, mark-to-market opportunities may flow out of a shorter-term lease approach.
Another aspect to consider is the fact that speed-to-market is often a critical requirement of users. Developers that can compress six months of lead-time and get a facility open sooner earn the respect and business of companies they are courting. That is especially true when factoring in the AI side of a facility. Again, that equation starts with controlling the power. Due to the global power shortage, which is still in its early days, it impacts every industrial facility. The lead time for switch gear is 12 to 16 months currently, creating another physical infrastructure constraint that must be managed. This is where collaboration with the utility provider is critical. Most local utilities are often out of power, or can only commit limited power capacity, at substations designed to serve a building, so a new substation may need to be built, adding more time to the development schedule, as will securing entitlements, feasibility studies, cost analysis and state electric regulators’ approvals. Any way a developer can expedite a company taking occupancy sooner can be rewarded.
So what will the future look like within the industrial sector and how will it come to reality? Kasselman points out that the horizon likely encompasses an environment in which the software as a service (SaaS) model applies to everything. “I would anticipate we’d operate with more complete and perfect data, which will allow decisions to be made faster with less risk,” says Kasselman. “We will be more informed yet will have too much information that needs to be evaluated. Thanks to advances in computing power and AI, all of this is more manageable than ever, and is improving exponentially.”
The profound changes because of this data flood will take statistical probabilities and therefor risk mitigation (think ““Money Ball” on steroids) to an entirely new level, and by definition it will be exponentially scalable. The caliber of that data will be enhanced by your own custom AI and manifest itself on a phone, a ring, contact lens or your clothes. It will allow information to be recalled instantly and be incorporated into business situations. “For example, if a broker is meeting a business prospect in a networking setting, that person will be recognized, and the information gathered from past encounters will be available and translated into a business context. Work history, recent awards, kids’ names, colleges attended, absolutely everything,” says Kasselman. “Having an information companion will help you remember details you knew but forgot or weren’t able to recall upon subsequently meeting them.”
Digital twins will continue to emerge in this new environment, too. These simulated models will be built at scale, without limits and with stunning effectiveness. Lightning-fast data throughput plus advanced graphics, all processed via the massive computing power of 5G, 6G, and eventually quantum computing, will allow virtually unlimited variables to be changed and simulated in real-time to produce outcomes before a real physical decision is made and capital is deployed.
“That will reveal which set of variables will produce the desired result at the lowest cost and the fastest way. The only up-front cost was computing power and software” says Kasselman. “Many experts and futurists predict that in five to 10 years every human being will have a digital twin of their own body. That could be used by physicians to assess the impact of any new medicines being prescribed or surgeries contemplated, and it could be required by law before any medicine or procedure can be administered.”
Currently, a massive digital twin exist of the entire Orlando metropolitan area. That allows the city to simulate the next Disney-like mega-development to determine impact on traffic, schools, energy consumption, fire/life/safety, and many other areas well before development approvals are secured to turn the first shovel of dirt. There is already a digital twin of the entire Earth’s weather patterns, too. The simulations model every condition, variable and location to produce vastly improved weather patterns and predictions. The advances in the coming decade are only going to improve.
Bringing all these advancements into an industrial setting won’t happen without effort, risk and patience. There will be a “magnifier effect, predicts Kasselman. “It's going to make good things great and bad things worse in equal proportions,” he says. That is because those seeking good results and to generate good things in the business world, will be countered by those not on that same agenda. There will be some unintended consequences, invariably, as situations play out in unexpected ways through X Factors and change progression. Businesses sometimes can’t or won’t move as quickly as the technology is capable of moving, whether because they are trying to understand opportunity costs, capital costs, and ROI metrics, believe advancements won’t scale across their system, will require too much training, or they are still working to achieve ROI from the last change.
Political changes will be required for these shifts to take place, as well. The current lawmaking bodies at the state, county and federal levels are making life altering legislation and policies as it pertains to AI, yet there few if any who actually use the technology, nor do they understand it fully, which has created a disconnect. Once those who do understand it step into those positions of political power with a perspective of digital entitlement, expect to see digital alignment follow.
Changing how an industry has operated for decades and adopting a new business dynamic won’t be easy or quick. Reinventing an entire industry will require innovation, open minds and digitally entitled leaders. But make no mistake, before the expiration of the 10-year lease signed this year, the industrial sector will be unrecognizable compared to today’s version.
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Geoffrey M. Kasselman, SIOR, is CEO of Evoke Partners and SIOR Past-President. An award-winning digital & sustainable real estate strategist, public speaker, and futurist, Geoffrey Kasselman provides clients, partners, and the broader real estate industry with current market dynamics and near-future trends and vision. |