Robots, Automation and Industrial Space
By Bill Wheaton | September 2018
There is no end to articles suggesting that automation is about to radically change the way the service sector works – and the types of space it needs to do this work [McKinsey (2016), Frey and Osborne (2013)]
However, there is one sector where automation has already been occurring – and for more than 2 decades. US manufacturing has been transformed with an onset of robotics. At CBRE we have just completed a study of how industrial automation and robotics has changed local industrial space markets. Using data from an MIT colleague, we examine the largest 45 metro areas to ask how the industrial space market fared in those MSA whose industries automated over the 1990-2007 period relative to those MSA where industries did not automate –or did so much less.
The data we use on robotics comes from the IFR (International Federation of Robotics). Industrial robots are made in a relatively few countries, but installed worldwide. The installation process is both expensive and time consuming. Each robot made since 1990 has a VIN number and the IFR records to whom it was sold and then installed. With this data it is possible to construct an estimated of how many industrial robots were installed each year in the US – in each market (MSA). We cumulate up the installations and obtain the local growth in robots between 1990 and 2007 – and then divide this by total local employment. In effect we obtain a measure of how the density of robots per worker has grown in each of our 45 metro areas.
As firms switch over to robotic manufacturing, the local industrial market can be impacted in many ways. Most obviously the amount of factory floor space needed per unit of production can change, but also market-wide industrial space demand will react to alterations in the supply chain, inventories, and facilities needed for the repair, installation or modification of the robots. Hence we chose to study how the overall industrial market (warehouses as well as factory space) reacted to differences in local robotic growth. With CBRE data, we tracked the growth in industrial occupied space, and well as industrial space rents (adjusted for inflation), over 1990-2007. We excluded the last 10 years since they have been so dominated by manufacturing cyclicality from the Financial Crisis.
Our initial statistical results were quite pronounced. Over 1990-2007 the cumulative growth of robotic density averaged 2 additional robots per worker, but varied across markets from virtually zero to a maximum increase of 8.4 robots per worker. An increase of 3 robots per worker represents 1 standard deviation within this distribution. An MSA with an additional growth of 3 robots per worker would see its industrial space demand grow 25% less. To put this into context, average occupied space growth over this period was 34%, so a market with an increase of 3 more robots/worker over this period would have seen occupied space growth of only 9% versus 34%. Similarly, the same 3 more robots per worker reduced industrial rent growth 20%. From average rent growth of -4%, such a market would see its (constant dollar) rent growth drop to -24%. These results were very significant statistically, but the analysis so far leaves two questions unanswered.
The first is an argument that the correlation between industrial space demand and automation might be spurious. Areas hard hit by import growth, for example, might see reduced employment, reduced occupied space, and an infusion of robots by domestic manufacturers to try and remain competitive. Hence automation might not be causing industrial space demand to shrink, rather adverse local economic shocks are jointly causing layoffs in space as well as employment and these are generating the substitution of robots. In our research, we ran additional estimations that controlled for a range of adverse economic shocks (Imports, NAFTA, the general shift to services from goods production), but none of these diminished the statistical importance of increases in robots/worker.
The second question concerns the type of space robot adoption uses. Empirically, most of the local growth in occupied industrial space comes from the construction of new factories and warehouses – and not from changes in vacancy rates, or from the closing and abandoning of existing buildings. If automation required new factories we should see a positive correlation between its growth and that of occupied space. The negative correlation we see in the data suggests automation is perfectly able to fit into existing structures – and at lower space utilization rates than prior industries required.
Industrial automation has enabled many American industries to remain competitive, preventing further declines in US industrial production, and in many cases increasing output. That said, automation has not increased industrial employment (just the opposite) and we now have some evidence that it similarly may reduce the net demand for industrial space.