False Alarm

By J.W. Elphinstone

Despite the recent hoopla arising from mandates by retailers and the government to use radio frequency identification tags, benefits to the real estate industry may be seriously overblown. Although RFID will speed up the supply-chain process, its application will only mildly affect demand for and design of industrial space.

RFID stands to increase supply-chain efficiency as products move from distribution centers to retailers. Besting its bar code counterpart, an RFID tag stores more product information and, through its small antenna, can be scanned by radio frequency readers from as far away as 300 meters.

And unlike a bar code, RFID tags can be read without line-of-sight; the antenna just needs to be in the reader's range to record inventory information, thus reducing the necessity to manually scan each item.

Though around since the 1940s (see "New Tricks"), RFID has been used commercially for only the past two to three years, according to Beth McClurg, director of global corporate services for CB Richard Ellis Inc. Before that, the technology was confined to experimental research groups on small-scale applications.

RFID reemerged in January 2003 when The Gillette Co. purchased 500 million units from Alien Technology Corp., which produces RFID tags. Then in June 2003, Wal-Mart Stores Inc. issued a mandate that its top 100 suppliers install the tags on all pallets and cases by January 2005. The retail giant followed with another mandate in August 2003, requiring all suppliers to incorporate RFID tags by the end of 2006. And in October 2003, the U.S. Department of Defense followed with its own policy that dictated all products?at the case or pallet level?had to be tagged with RFID.

"These mandates clearly have been driving the implementation timeline," said McClurg. But how does that affect industrial real estate?

Opposites Attract

Two lines of thinking stem from the RFID narrative regarding demand for industrial space. In one corner, if productivity increases and inventory tracking is improved, there will be a reduced need for backup or emergency stock, which then decreases the need for industrial space. But in the other corner, increased productivity will allow retailers to pass along lower prices to the consumer, which will drive up demand for products and thereby increase demand for industrial space.

In an RFID research report issued in April 2004, AMB Property Corp. concluded that demand for industrial space after RFID will change by only a few basis points. "On the macro level, there won't be a huge impact," said David Twist, vice president of research at the company. "Storage facilities will suffer more in demand than distribution centers, but not that much."

This conclusion is shared by most industrial owners and developers. In general, they see RFID as a technology that supports the supply-chain evolution. For the past 10 years, as inventory and distribution processes have sped up, the number of smaller warehouses in metropolitan regions have decreased and are being replaced by larger, strategically located warehouses, explained Barry Hibbard, vice president of real estate at Tejon Ranch Co.

"There is already the trend toward larger distribution centers since personal computers came out," said Sean Maher, senior vice president of development at CenterPoint Properties Trust. "RFID just feeds into this larger trend. It will allow operators to pump out more volume with fewer mistakes."

While Patrick Gallagher, senior vice president at The Alter Group, does not predict a major drop in big-box demand, he does see an increased need for other types of industrial buildings, namely narrower ones designed to move product faster from one end to the other. The narrower design would apply to warehouse facilities near airports, Gallagher explained, but not as much to larger spaces near intermodal hubs that switch inventory from one mode of transportation to another.

"In airport facilities, the inventory is turned over much faster," he said, "whereas intermodal facilities do more mixing and storing of the inventory."

AMB also emphasizes the increased importance of cross-docked warehouses in keeping up with faster shipping-and-receiving movements within the facility. Inventory will spend less time on shelves, which will reduce clear heights. And parking and storage will remain critical in handling the more frequent shipments and deliveries.

Installation Migration

The actual installation of RFID readers into pre-existing warehouses will prove facile. "It's just a matter of getting electricity and connectivity," said Twist. "Most functional market standard facilities can easily be run with new cables and wires."

McClurg noted that the positioning of readers may make one facility more desirable than another. If two RFID readers were staggered at a dock entrance, then the readers would be able to pick up directional data from the passing inventory, thus identifying whether the stock is on its way in or out of the warehouse. "RFID clouds," or clusters of readers, could be stationed throughout the facility to take real-time inventory.

But no one is changing their warehouse design just yet because tenants are not asking for it. "That's what it would take," said a spokesperson for IDI. "Someone who uses or is going to use the technology coming to us with a 'new' model of what they want for their warehouse or distribution center."

Until that time, the RFID discourse may be premature. Both real estate and technology executives agree that widespread RFID usage by suppliers is still at least five years away. Even though Wal-Mart suppliers have complied with the discount retailer's mandate, they have not modified their distribution processes.

Those suppliers have only slapped RFID tags on the cartons or pallets destined for Wal-Mart's three specified distribution centers, noted Steve Banker, service director for supply-chain management at The ARC Advisory Group, but they have not utilized the tags from end to end in their supply-chain processes.

Money Talks

"RFID is an application that doesn't make sense for suppliers right now because of its cost," Banker said. "And Wal-Mart is not paying more for the products to offset the cost." By contrast, the Defense Department is reimbursing its suppliers for the infrastructure and application of RFID.

In fact, the least expensive tags can run from 10 to 30 cents each, too much for individual tagging of low-cost products such as soap. The more sophisticated tags can cost as much as $10 each. "We need to take it down to five cents or lower to be cost effective on an item level for businesses," said Sam Liu, director of RFID product management at Sun MicroSystems Inc.

And RFID readers average between $1,500 and $2,500 apiece. Banker directed a survey in November 2004 that measured the cost benefits of RFID implementation. Of 24 companies actively using RFID, only one company believed it would have a payback period of less than two years.

Still, the RFID ball has started to roll. And as the technology matures, its cost will inevitably go down. By the third quarter of 2005, as many as four new RFID manufacturers will enter the market, Banker predicted, adding to the two dominant ones: Alien Technology Corp. and Symbol Technologies Inc. Additionally, Sears and Target are poised to follow Wal-Mart's mandate, thus necessitating industrial users to conform to RFID usage.

"In the end, RFID will eventually end up on every item, but no one knows the time frame," said Hibbard. "But I don't see how it will change the trends that (industrial owners and developers) have been tracking for the past five to 10 years."



New Tricks for an Old Technology

Though considered a forward-looking technology, RFID has been around since World War II, when the British used a radio frequency device to identify friendly aircraft. Since that time, RFID technology is used in hospitals to monitor quarantined patients, in employee security cards and in automatic toll collection devices.

"We're still at the make-it-work stage," said Phil Lazo, vice president & general manager of the RFID division at Symbol Technologies Inc. "When it works, then there's a miniaturization phase. We're between 12 and 24 months away from that."

Aside from retail, which Lazo considers a hotbed of activity, other industries are poised to become big users of the technology. The airline industry will be able to track luggage more efficiently by employing active tags, or battery-powered tags that always transmit a signal; a passive tag lacks a battery and requires a nearby reader to activate it. Passive tags, which cost less, are the most common tags used by retailers.

The Defense Department, already a big adopter, uses RFID to track high-security items. The U.S. Federal Drug Administration has issued directives to improve pharmaceutical transport and security, according to Sam Liu, director of RFID product management at Sun MicroSystems Inc. In years to come, a drug manufacturer will be able to track down and recall one specific bottle of painkillers that has been damaged or contaminated, rather than having to recall an entire lot.

The recent ratification of an RFID standard, coined Generation 2, by EPC Global should improve the product's reliability from different manufacturers, predicted Liu. And international standards are now in the process of being approved by the International Organization for Standardization.

In May 2004, Liu's company set up an operational RFID testing center, owned by AMB Property Corp., in Dallas to evaluate all the RFID products currently available and to understand how to best utilize the technology. "When it comes to new technology, there's bound to be glitches and obstacles," Liu said, "but there has been drastic improvements in the last year alone."

For example, tags can now be read through liquid and metals without interference, and the readable distance has increased to almost 300 meters. Other improvements to follow include smarter readers that can store more-complex information and tag antennas that do not require specific positioning.