May 2004 A New China Syndrome By Paige Orr
Up until recently, demand for new warehouse space in Middle Tennessee had slowed to a trickle. For the culprit, Randy Wolcott looks toward the East.
Lower wages and political stability in China are winning over much manufacturing traditionally generated in North America. “Jobs are being lost in the U.S. as third-party logistics and packaging companies lose business to Chinese companies, and that affects the need for warehouse space here,” says Wolcott, vice president of Nashville-based ProVenture Commercial Real Estate.
He also points west, to Bentonville, Ark.-based retail giant Wal-Mart. Legendary for its sourcing of cheap goods, Wal-Mart is responsible for 10% of all U.S. imports from China. According to Wolcott, the company has played a leading role in the decrease in domestic demand for industrial real estate. Because the retailer buys products that are not only made offshore but also packaged for sale there before arriving in U.S. ports and shipped to Wal-Mart warehouses, the demand for third-party logistics and packaging companies has been decimated in this country. When business slows for these companies, so does their demand for warehouse space. (ProVenture is in a strategic alliance with Ozburn-Hessey Logistics, a Nashville-based logistics company.)
But is the outlook for industrial real estate really that bleak? Some see the recent shift in traditional demand as part of cyclical changes signaling a new kind of warehouse tenant, not the absence of them. According to Dan Wilkinson, we would be “nuts” to blame Wal-Mart and offshore manufacturing for a slowdown in the local industrial real estate market. Wilkinson, president of real estate firm Colliers Wilkinson & Snowden in Memphis, says, “Wal-Mart may be a gorilla and a significant factor, but Wal-Mart—as huge as it is—is not the entire market.”
Wilkinson says Memphis and Nashville’s central location give them an opportunity to use warehouse space as distribution centers for quickly sending out products to the majority of the nation’s population. Nearby automobile plants in Mississippi, Alabama and within Tennessee further boost the demand for logistics and distribution.
Also, Memphis boasts the world’s largest cargo airport, moving 35% more freight than the No. 2 cargo airport in Hong Kong. Seven major rail carriers serve the city, making Memphis ideal for companies needing massive distribution centers that fill as much as four million square feet each, Wilkinson says. Hewlett-Packard, Nike and Williams-Sonoma already have centers in the Memphis area.
While these major cities are somewhat insulated, the shift in demand for industrial space has an acute effect on smaller communities already suffering from the loss of domestic manufacturing. Their lack of cargo airports, multiple rail carriers or more than one interstate running through them make them especially vulnerable. “We’re talking about a national issue,” Wolcott says.
As for the larger Tennessee cities, a recent burst of industrial real estate activity has led to the rapid absorption of vacant space. Wolcott cites a handful of corporate relocations to Middle Tennessee, along with expansions of existing operations, as improving an otherwise dismal industrial market. He expects two or three 400,000-square-foot-plus warehouses to start construction in the Nashville area in coming months. So why worry about a falloff of manufacturing here? Wolcott warns that the uptick in the first part of 2004 was a “phenomenon going through the market.” He says the next few months will present a clearer view of the market’s health and that even if things are improving, the downturn of the past two years would have been less steep—and the upswing even stronger—if not for manufacturing lost to overseas.
As for Wilkinson, he sees this moment in the market’s evolution as a “fabulous opportunity” to take advantage of the existing demand for distribution space. Tennessee ought to capitalize on companies’ growing needs for fast product delivery to U.S. consumers. So, rather than bemoaning the changing makeup of potential warehouse tenants, the more agile players are better off seeking more profits than assigning blame.
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