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Industrial Real Estate and the North American Supply Chain Revolution

Industrial real estate might be one of the strongest-performing property types out there in recent years, but it is far from immune to change. Experts…

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Industrial real estate might be one of the strongest-performing property types out there in recent years, but it is far from immune to change. During the panel “Industrial Real Estate and the North American Supply Chain Revolution,” held at NAIOP’s CRE.Converge conference in Seattle this week, Chad Griffiths, MBA, SIOR, partner and associate broker at NAI Commercial Real Estate, spoke with Matt Carroll, senior associate at Avison Young, about what’s in store for industrial properties in the coming years.

The background to modern-day industrial real estate is an ongoing dialogue about globalization versus deglobalization as the pandemic fades into the rearview mirror, Carroll said. There are proponents of manufacturing overseas and supporters of manufacturing in North America, as well as a paradigm shift from optimality toward optionality. “Optimality was … ’I want to be as efficient and low in cost as possible,’” he said. “And as we come out of the pandemic era, what you hear a lot of people talking about is having optionality…’If I can’t move all of my manufacturing back to the U.S., I want to least have the option to mitigate my risk by having the presence of manufacturing on this side of the hemisphere.’”

Another transformative force the panelists discussed was a recent rail merger, the acquisition of Kansas City Southern by Canadian Pacific. The merger will result in the first trans-American rail line linking Mexico, the U.S., and Canada, which Carroll described as like a tree with roots in Mexico. Griffiths said developers should consider opportunities for intermodal yards, airports and other industrial properties along the “trunk” of that tree.

“It’s a $30 billion merger. So that wasn’t small change, and I have to think that they did that because they want to capitalize on Mexico becoming a manufacturing powerhouse,” he said.

The panelists discussed other major transformations they expect in the near future, as well. Both agreed that buildings will face a growing need for electric vehicle (EV)-charging infrastructure, and many will struggle to deliver since most warehouses aren’t built with high power demand in mind. “It can actually render some functional obsolescence if these buildings aren’t able to accommodate future use,” Griffiths said. Properties may be able to supplement their power access with on-site solar generation, but some won’t be physically strong enough to support the weight of rooftop solar. An action item for developers now: install sufficient conduit for greater long-term power needs ahead of time, so that capacity is there when it is needed.

During the Q&A session, one audience member mentioned that his company is putting in three times as much power in its properties compared to five years ago.

Beyond just the power component, industrial properties will also need to grapple with where to place EV-charging infrastructure on-site. Where can trucks linger on-site for an hour while charging, without disrupting loading and unloading? “We’re talking about EV-charging courts,” said Mason. “So, you don’t want to necessarily have your trucks just sitting there…instead they’re going to come bring the trailer in, and then you’re going to have them go to a separate place for charging.”

Outside of EVs, another growing power draw to expect is automation. The panelists said drone delivery is getting closer to reality, alongside collaborative robots that support workers in the warehouse.

One possible black swan event that could negatively impact the property type: Automation technology is making 60 to 80-foot warehouse racks possible. While emphasizing high cubic feet with a smaller footprint could help developers provide more efficient logistics space, this could be very disruptive to the market.

Griffiths said this might leave the current stock of 36- to 40-foot warehouse buildings in a tough position. “I think that that could render those buildings, just from a competitive standpoint, less valuable, because now a company has to pay on that square footage,” he said. Carroll added that this might be geographically based, with markets where land is cheap continuing to emphasize lower, larger buildings. “So, my quick thought would be I think it’s going to be geographical. If you go to a place like Indiana where there’s a lot of land to develop, I think the warehouses will remain similar in size as they are now, in terms of ceiling height,” he said.

Industrial real estate has been on fire for a long time, and markets are now starting to see vacancy rates tick up. Meanwhile, consumer preferences changing to favor experiences could result in moderation of demand. As long as people are buying goods, though, there will be a need for warehouses, tall or short, close to our homes.

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This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2023. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Understanding Carbon Goals and Approaches for Developers

As investors and occupiers look to improve the sustainability of their investments and operations, decarbonizing the built environment is an increasingly…

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October 20, 2023

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As investors and occupiers look to improve the sustainability of their investments and operations, decarbonizing the built environment is an increasingly important real estate decision.

In a panel at this week’s NAIOP’s CRE.Converge conference, sustainable building professionals explored some of the strategies their firms are using to mitigate carbon emissions across their industrial real estate portfolios. Nate Maniktala, LEED AP BD+C, MBA, a principal at building consultancy BranchPattern, moderated the panel and began by addressing the scope of the need for sustainable building methods.

According to Julia Wattick, AIA, LEED AP ND, Fitwel Ambassador, a senior associate and team lead at BranchPattern, there are two broad types of carbon in buildings: Embodied carbon from the building’s entire lifecycle and operational carbon from building use. “There are actually seven years of operational carbon emissions that typically equal that upfront embodied carbon impact,” she said. Out of that embodied carbon, concrete is the leading emissions culprit, accounting for over 11% of global greenhouse gas emissions.

Real estate businesses feel pressure to address carbon from several main sources. According to Josh Hullum, executive director of construction at Affinius Capital, “It’s understanding the impact from our investors. I think that’s the loudest voice in the room, particularly as you go north to Canadian or European investors. For every dollar received, there’s an element of expectation for more responsible design and development.”

For Jennifer Emrick, LEED AP BD+C, global construction sustainability manager for Prologis, there is occupier as well as government pressure. “We have customers that are also setting their own internal carbon goals, so they’re coming to Prologis and they’re wanting to understand how we can meet these goals,” she said. “And so, we want to be able to work with them, be a partner, have the knowledge and the expertise to let them know what’s the path to get to that goal.”

Emrick also pointed to recent U.S. sustainability regulations such as New York City’s Local Law 97, and others in Denver and California, as encouragement for Prologis to adopt more sustainable construction practices.

According to Wattick, there are five types of building decarbonization efforts, ranked in order from most impactful:

  1. Renovation, the highest-priority impact area since pre-existing buildings have already generated much of their embodied carbon.
  2. Reduce the use of carbon-intensive materials through design.
  3. Reuse existing materials, and design for future reuse.
  4. Replace materials with a high carbon impact with less impactful ones.
  5. Require low-carbon materials for new projects.

The panelists used a range of approaches to achieve these goals. Mass timber was widely suggested as a useful, lower-carbon material, alongside different concrete mixes utilizing fly ash or other Supplementary Cementitious Materials that partially or completely replace Portland cement. Additionally, novel building technologies like Nexii wall panels, which use sand and a binder to replace Portland cement, or Total Integrated Panel Systems (TIPS), which add a foam core to concrete, can be critical for reducing embodied carbon as well.

At Affinius Capital, Hullum pointed to one project where his team installed high-performing insulation, resulting in a slightly higher embodied carbon footprint in return for enhanced operational performance. “It’s not all about driving embodied carbon as low as possible at the sacrifice of the long-term utility…you have to holistically ask what’s the best approach,” he said.

Reducing the carbon footprint of buildings isn’t an easy task, but it can be accomplished with the right planning ahead of time. “The whole team is going to have to collaborate and work together, which they do already but inherently it’s going to be more difficult when you’re doing something new like the TIPS panels,” Emrick said.

In return, property teams may be able to realize drastically improved building carbon performance, while seeing similar or only slightly higher development costs. The broader sustainability impact of properties is now considered alongside financial metrics, Hullum added.

Read more in a two-part pre-conference series on this topic:

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This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2023. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Why the index of leading indicators failed: examining the once in a lifetime post-pandemic tailwind

  – by New Deal democratCarl Quintanilla observed the one year anniversary of the following two days ago:I’ve written previously about what confounded…

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October 20, 2023

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 - by New Deal democrat

Carl Quintanilla observed the one year anniversary of the following two days ago:




I’ve written previously about what confounded that forecast. But let me highlight those issues again.

1. A 40% drop in gas prices, and a generalized 10% drop in commodity prices can do wonders for both producers and consumers.

Here’s a graph of the YoY% change in all commodities (blue), together with the YoY% change in oil prices (red, /10 for scale) going back 100 years:



The decline in commodity prices that began after June 2022 was only exceeded in the past 100 years by that during the Great Depression, the Depression of 1938, and the Great Recession. 

Here’s what absolute gas prices looked like:



So long as you don’t have wage deflation (as in the Great Depression), that is a powerful stimulant to downstream producers and consumers, who have more money freed up to spend on other things.

2. The freeing up of post-pandemic supply chains.

Not only did the un-kinking of supply chains help spur the above deflation in commodity prices, but they also provided a bigger capacity for production, particularly in the important motor vehicle industry (more on that below).

3. The slowdown in China probably also helped with the downturn in commodity prices for competing, and downstream, US producers and customers.

Good data out of China is hard to come by, but there seems little doubt that the Chinese economy has slowed sharply. Here’s the annual % change from FRED:



There is little doubt that the Chinese economy has slowed compared with its Boom years.

4. The unique post-pandemic un-kinking went directly to flaws in two very important leading indicators.

No leading indicator is perfect. The ISM manufacturing index has been around for 75 years, and had a near-flawless record of leading recessions, particularly if the total index fell below 48 and the new orders index fell below 45. But not only has manufacturing as a share of US GDP declined, but the ISM has the flaw of being an unweighted diffusion index. You count up the areas contracting vs. the areas growing, and if the former are greater than the latter, you get a reading below 50.

But because the index is not weighted, it can miss times when a downturn is broad but shallow vs. a sharp, concentrated upturn. And that’s what happened in 2022 and this year.

The below graph shows that the total index and its new orders subindex declined to recessionary territory by late last year - and have stayed there throughout this year:



But there has been a concentrated upturn in the motor vehicle industry, as shown by the below graph showing the # of light vehicle sales, industrial production of vehicles, and the $ amount of retail spending on vehicles:



All of these show a strong upturn since late 2021.

Similarly, pandemic-related bottlenecks in lumber and other production for the construction industry caused housing units under construction - the *real* economic measure of that important leading industry - to lag far more than usual behind the “official” leading indicator of housing permits:



Instead of turning down 3 or 6 months after permits, units under construction did not peak until a full year later, and even now are only down 2% from that peak.

The bottom line is that both the producer and consumer sides of the US economy benefitted since June 2022 from a gale-force tailwind, part of which was a (hopefully) once in a lifetime aftermath of a pandemic. That tailwind just happened to attack the weak points in several important leading indicators.

But as I have pointed out several times in the past few months, that tailwind almost certainly has ended.

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Two US Hostages Released For Humanitarian Reasons, Hamas Says, After Israel Tells Troops They’ll See Gaza “From The Inside”

Two US Hostages Released For Humanitarian Reasons, Hamas Says, After Israel Tells Troops They’ll See Gaza "From The Inside"

Update(1308ET):…

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October 20, 2023

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Two US Hostages Released For Humanitarian Reasons, Hamas Says, After Israel Tells Troops They'll See Gaza "From The Inside"

Update(1308ET): With Israeli infantry and tank forces states at the border, having been given the green light to enter Gaza by the Netanyahu government, there's been a potential breakthrough related to American hostages held by Hamas. A Hamas spokesman has announced the release of two US hostages:

The spokesman for Hamas’s military wing, the Al-Qassam Brigades, has said that the group has released two US captives for humanitarian reasons.

“In response to Qatari efforts, Al-Qassam Brigades released two American citizens (a mother and her daughter) for humanitarian reasons,” Abu Obaida said in a statement.

He added that the move aimed “to prove to the American people and the world that the claims made by Biden and his fascist administration are false and baseless”.

The announcement has not received immediate government confirmation from the US side. But Israeli officials appear to be confirming:

The Israeli military earlier in the day announced that it believes the majority of the some 200 hostages in Gaza are still alive. This as the defense minister also told troops massed that the border that they will soon see the Gaza Strip "from the inside". 

If the hostage release is confirmed, this could be a move by Hamas to buy more time before the large Israeli ground incursion, which is likely to result in high casualties among both sides. Meanwhile, President Biden has said Friday that the first Gaza aid trucks are likely to cross into Gaza from Egypt in the 'next 24 to 48 hours'. Washington is also leaning on Israel to see if more hostages can be negotiated for, prior to the ground assault:

US PRESSES ISRAEL TO DELAY GAZA INVASION TO WIN HOSTAGE RELEASE

* * *

Just ahead of President Biden's Thursday night speech wherein he made the case for the US keeping up funding both for Ukraine and Israel as it launches its war in Gaza, Axios issued a report detailing that Washington is preparing to divert ammunition meant for Kiev to the Israelis. 

"The Pentagon plans to send Israel tens of thousands of 155mm artillery shells that had been destined for Ukraine from U.S. emergency stocks several months ago, three Israeli officials with knowledge of the situation tell Axios," journalist Barak Ravid wrote.

Image via Kyiv Post

These 155mm artillery shells, which Ukraine has been badly in need of given Russian artillery supplies have been steady and far superior, will be shipped "in the coming weeks" instead to Israel in order to fill the depleted emergency stocks the US keeps there.

Under a long-standing bilateral agreement, the Pentagon stores ammunition on Israeli soil. While it belongs to and is overseen by the US military, part of the agreement is that Israel's Armed Forces (IDF) can access it under US approval in a war scenario.

Starting at some point in late 2022, these emergency stockpiles of artillery shells held in Israel began being sent to Ukraine. But now, with the Gaza war entering full swing, Israel will get the extra supplies instead. 

This move without doubt is yet another blow to the Zelensky government, which has retreated from the media spotlight ever since the Hamas terror attack on southern Israel on Oct. 7. International press has focused on 24/7 Israel-Gaza coverage. A key part of Ukraine's strategy of keeping up constant support, which has included tens of billions in aid flowing in from the West, has been to keep Zelensky and the Ukrainian cause center stage in terms of global awareness. Now those days appear over.

Pentagon spokesman Patrick Ryder sought to defend the move, stressing "we can support both Ukraine and Israel in terms of their defensive needs," in line with other top US officials.

"We are engaged in comprehensive coordination across the Department of Defense," an unnamed US defense official had told Axios. "This includes working closely with our combatant commands to ascertain which munitions and equipment from the U.S. inventory can be quickly made available for Israel’s needs."

Biden's Thursday night speech sought to continue the theme, which had also been laid out earlier this month by Defense Secretary Lloyd Austin. Biden also said that both Putin and Hamas want "annihilation". According to a summary of Biden's main points:

Biden said he will ask Congress on Friday to authorize more spending for the Ukraine war and “unprecedented” military aid for Israel. Media reports say the request will be for about $100 billion and will also include aid for Taiwan, which China will view as highly provocative, and funding for border security.

About $60 billion is expected to be for Ukraine as the White House wants to pass a spending package on the war that will last through the 2024 election. Israel is set to receive about $10 billion in military aid, and the rest will go toward the border, Taiwan, and potentially other areas in the Asia Pacific.

In his speech, President Biden attempted to draw comparisons between Hamas and Russian President Vladimir Putin. “Hamas and Putin represent different threats, but they share this in common: they both want to completely annihilate a neighboring democracy, completely annihilate it,” he said.

Via AFP

But no matter Biden's superficial attempts to draw comparisons between the two conflicts and how it's somehow America's 'duty' to jump into supporting both wars, Ukraine is clearly no longer the number one priority for US defense planners.

Already, poll after poll has shown the American public to be "war-fatigued" as well. Popular support for funding Kiev has been waning, also in Europe. The Pentagon itself has lately admitted that money to Ukraine will not be "indefinite". 

Tyler Durden Fri, 10/20/2023 - 13:08

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