Mhlnews 7324 Auto Revolution 1

The Automotive Revolution and Its Impact on Commercial Real Estate

March 10, 2017
The increasing complexity of cars and growing number of parts suppliers has created an intricate supply chain that must perform like a well-orchestrated symphony.

America's love affair with the car extends back more than a century. For me, the romance blossomed early. Growing up, my father owned a used-car wholesale business on Jerome Avenue in the Bronx, a fly ball away from the old Yankee Stadium. I saw how much my dad loved his work, and how happy his clients and customers were with the way he conducted his business. My first ride was a 1979 midnight blue Pontiac Trans Am, and it was a beauty. From there I was hooked on American muscle.

Times were simpler back then, and so were automobiles. My dad—a businessman, not a mechanic—would bring home different cars on a nightly basis, and my brother and I helped him prep them for sale. Whether we changed spark plugs, got an electric antenna to work, rotated tires, pulled dents, or simply detailed the cars, there were always cars around that needed some level of attention.

In recent decades, though, cars have become increasingly complex. Early changes were driven by skyrocketing oil prices and new government auto emission standards. Lately, the big game-changer has been technology. Today's cars act as mobile computers. Innovative features like self-park, blind-spot warning systems and collision-prevention assist now come standard on many new vehicles. Apple CarPlay takes things you want to do with your iPhone while driving and puts them on your car's built-in display.

These are just a few of the innovations that are emerging at a fast and furious rate. For the most part, the developments focus on autonomy, safety and efficiency. It's all part of what's being called a "fourth industrial revolution" that the World Economic Forum says is being driven by connectivity, electrification and changing customer needs.

The escalating complexity of cars has put automakers smack dab in the middle of the tech talent war. Detroit's Big Three no longer are just competing against their Asian and European counterparts, but they're also battling the likes of Facebook, Amazon, Apple, Google and other tech giants in recruiting top software developers and engineers.

Technology isn't just affecting the cars themselves; it has also radically changed the way cars are produced. Although the basic premise of the assembly lines Henry Ford pioneered in the early 1900s remains the same, many of the repetitive production tasks are now being handled by robots. And auto plants that used to be greasy, grimy factories are now more likely to resemble a Silicon Valley clean room.

We've all heard the dubious tales of sand entering one end of Detroit's Rouge River and coming out as windshields at Ford's riverside plant. At one time, it was the largest industrial manufacturing facility in the world (and inspiration for both Soviet planners and Korean chaebols). Today, the massive complex has gone green, featuring, among other things, an eco-friendly roof that reclaims rainwater.

The Rouge River plant manufactures Ford's best-selling F-150 truck. An iconic vehicle that formerly was a tank made mostly of steel from Michigan, Indiana, Ohio and Illinois, the F-150 is now primarily made of lightweight aluminum. It features the same classic lines and surefooted sturdiness, but in a much lighter body.

An Intricate Supply Chain

As cars have become more complex, automakers have come to rely more and more on outside providers for the parts they need. They've shifted away from actual manufacturing to assemblage. Thousands of different suppliers now provide the thousands of parts needed to produce a car. And, to a large degree, automotive companies have offloaded the warehousing of these parts to the suppliers that make them.

The evolution has created one of the most intricate supply chains that exists today. Each component, from tiny screws to fuel systems and tires, requires an inventory and distribution solution that ensures carmakers will have the parts they need—when they need them. I liken it to a well-orchestrated symphony.

As head of Cushman & Wakefield's Automotive Specialty Practice Group, this is the lifeblood of the work my colleagues and I perform for our clients, including some of the largest tier one suppliers in the world. It's exciting to see, from the front lines, how the automotive industry is helping to drive the record industrial space absorption that's occurring today—particularly in manufacturing-centric geographies like the Rust Belt. Because suppliers require close proximity to manufacturing plants to make those just-in-time deliveries, they're a huge part of it, too.

It puts a lot of pressure on the system, though. Carmakers and their suppliers are in need of more space at a time when industrial vacancy rates have tightened. And few available and existing auto plants can accommodate the evolving specifications of the sector. Accordingly, real estate developers are working to catch up with demand. They've built an average of 21.8 million square feet of manufacturing space during the past three years, approaching pre-recession averages of 24.4 million square feet. But new construction doesn't happen overnight, and time is the enemy of production, especially at a time when speed-to-market is critical.

There's a lot of chatter out there that cars are beginning to wane in popularity. People may be walking more, using mass transit, riding their bicycles, and using a ride service like Uber from time to time, but they're not giving up their beloved cars. Indeed, the U.S. auto industry saw record sales in 2016, with 17.55 million cars sold at an average price of $35,000, according to The New York Times. With low interest rates and low gas prices, I don't see that situation changing anytime soon.

Detroit is experiencing a renaissance the likes of which it hasn't seen in decades. And, along with the stabilization of pioneers, new electric vehicle (EV) players like Tesla, Faraday Future and Lucid Motors have entered the fray. They're all making significant investments in technology, and ramping up R&D activities in the Silicon Valley and other high-tech markets. Venture capital and private equity groups are betting on auto-related startups, too.

For a guy who grew up loving cars and admiring his father's business, it's fascinating to see the remarkable transformation that's underway. I can't think of another industry that's experiencing the kind of rebirth and regeneration that the auto industry is going through right now. And it's just getting started.

Jeff Green is a managing director for Cushman & Wakefield's Global Occupier Services (www.cushmanwakefield.com) and leads the firm's Automotive Specialty Practice Group.

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