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Jared Bernstein On The Discussion Around Stimulus

CNBC transcript: The Council of Economic Advisers member Jared Bernstein speaks with Kayla Tausche live during CNBC’s Capital Exchange today Q4 2020 hedge fund letters, conferences and more WHEN: Today, Wednesday, February 3 WHERE: CNBC’s Capital…

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Jared Bernstein

CNBC transcript: The Council of Economic Advisers member Jared Bernstein speaks with Kayla Tausche live during CNBC’s Capital Exchange today

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Q4 2020 hedge fund letters, conferences and more

WHEN: Today, Wednesday, February 3

WHERE: CNBC’s Capital Exchange, “The New Economic Agenda”

Following is the unofficial transcript of a CNBC interview with Jared Bernstein, member of the Council of Economic Advisers, and CNBC Washington Correspondent Kayla Tausche live during CNBC’s Capital Exchange today, Wednesday, February 3rd. Full video will be available at cnbc.com/capital-exchange.

Interview with Jared Bernstein

KAYLA TAUSCHE: First, we welcome Jared Bernstein, a member of President Biden's Council of Economic Advisers. Jared, it's good to see you. I want to start with the discussion around stimulus. We have heard in the last several days and in just the last several minutes even from Democrats that the need continues to go big. The White House has said that in recent days as well even as Republicans suggest that something more targeted is warranted by this moment. So where do you see the most fertile ground for compromise, what is a compromise price tag look like, and what programs might be ready for an edit?

JARED BERNSTEIN: Well, I think that's the key factor in everything you just described, Kayla – by the way, it's great to see you and great to be with you and great to have a chance for us to talk for a few minutes because usually we're all very compressed on CNBC. So I think the key thing there is the urgency, with which we need to get a package out that's commensurate to the size of the dual crises that face us. They said in the introduction of course, controlling the virus, distributing the vaccine, and finally, launching a robust recovery that has eluded us thus far. It's been much more a wait and see up and down kind of affair. And there, I think, to get to your political question there's actually lots of common ground. Now of course, there are places where we disagree and we can get into that, but I know Josh is going to be on from the Business Roundtable, they've certainly supported components of the plan. The Chamber of Commerce, along with the American labor movement – we've got Republican mayors across the country. Donald Trump and George W. Bush chief economists have said this is the kind of plan we need to get into the system quickly. So, in terms of sort of top line price, it's really not the way we think of it. I don't think that the right way to kind of do this arithmetic is say do you want to be at X or half X. What we want to be at is something that's large enough to address the crisis with alacrity and certainty. The danger is not going too big. The danger is going too small.

TAUSCHE: But the political reality, Jared, as you know well is that X’s might not be possible in Congress. Half X might be a more realistic proposition. So I'm wondering what you think might be, for instance, an appropriate income level for people to qualify for those direct checks. Whether minimum wage could be shelved for a future package. I mean how do you see the $1.9 trillion American rescue plan, being whittled down into something that is realistically passable on Capitol Hill?

JARED BERNSTEIN: Yeah, I think whittling down is the enemy of what we need to do here. I think whittling, I think, you know, inaction, I think wait and see, to me, and I think more importantly to the President, you know, that's the enemy of controlling the virus, distributing the vaccine and launching a robust recovery. So, again, I think the way to think of this is less kind of top down more bottom up. So let's pick an area where we disagree where Republicans would take this out of the plan. State and local. State and local assistance. Now states and localities, they have to budget – they have to balance their budget every year. They cannot run deficits. We've already seen them laying off well over a million workers disproportionally in education. So if we're going to reopen the schools, if we're going to control the virus and distribute the vaccine, if we're going to make sure that we not only rehire educators, but protect other public sector workers – cops, firefighters, those in public safety – I think it's glaringly obvious to the President that we need state and local relief. Another example, making the child tax credit. This is a refundable tax credit that goes to low income people –  you talked about income levels. This plan, which is in our plan – it's not in the Republicans offer – this plan, it's 120 billion. This cuts the child poverty rate in half. Now, that's some pretty impressive targeting. Now I know what you're alluding to is the direct impact payments or the rebate checks, and those do go up to families in the middle class. But you know, newsflash. Those families have also been experiencing really, very pressing economic hardships. Not just around rent or mortgages, but also around job loss, around wage loss, and they need help too. And that's also in the plan.

TAUSCHE: Jared, today, President Biden said he thinks he will get some Republicans to vote for this package. But I guess the question is, will he get 10 Republicans to vote for the package, or will he get a handful so that the White House can say that it passed with bipartisan support, but that you would still need to use budget reconciliation as a tool to actually get it across the finish line?

JARED BERNSTEIN: Well first of all, you just made a point that alludes a lot of people, which is reconciliation doesn't mean no Republicans joined the plan. And in fact, there's been many examples throughout history where reconciliation has actually been bipartisan. Somebody pointed out to me yesterday that the Child Health Insurance Program, or CHIP, has done reconciliation with votes from both sides. So I think that that's something to keep in mind.

TAUSCHE: Not 60 votes, importantly here.

JARED BERNSTEIN: It's a fair point. And I think that when it comes to sort of political nose counting, I'm just not the person you want to talk to about it. I'm thinking much more about the magnitude of the package. But that is, you know, key to the politics. I mean basically, the President has been open and, you know, by the way, this didn't start a couple of days ago, we've been talking to Republicans for weeks. And by the way, a lot of those Republicans were pushing some of the very checks that you're now hearing folks criticize. And there's, as I said, there's a lot of common ground when it comes to virus control, when it comes to helping businesses. So I think that the key thing there is that the President is willing to exchange information and ideas in any way that accomplishes the goals he set out for this package. Not moving quickly and not moving with the force to finally put this virus behind us and launch this recovery. That's the part that's not acceptable to him. But if anybody has any better ideas in how to get there more quickly, of course, you know, not only is he willing to listen to them, but he is listening to them.

TAUSCHE: So would you say that talks are actually going more productively behind the scenes than maybe these public statements would seem to signal?

JARED BERNSTEIN: I don't know enough about behind the scenes to really, you know, confirm that. But if you listen to statements that Susan Collins for example said coming out of the meeting that they had the other night, she was echoing a lot of the points that I've been making here today which is that both sides share the urgency of the moment. Now, you know, I don't know that she speaks for the whole caucus, but I think that those folks were bargaining in good faith in that meeting. And I think the difference there is are you willing to go far enough to meet the demands of the moment? So again, the American rescue plan is not calibrated from the top down. You didn't start with 1.9 trillion and say okay, let's fill in, see how we get there. It's calibrated from the bottom up. What will it cost to reopen schools? What will it cost to provide the relief to not just low income families as I mentioned with the child tax credit, but middle income families with the direct income payments? What will it take to control the virus and distribute the vaccine? And if you sum up the cost involved in that the full spate of measures that it will take to get this economy back on track and to put this virus behind it, you end up with the American rescue plan from our perspective. Now, I have not seen a convincing argument that says you end up accomplishing those same goals for, you know, one half or one third of that. And I think what the President is trying to say is that folks need to come at this from that perspective. Not from a top line perspective. You spend two, we want to spend one. More from a perspective of what will it take to get the job done. That's our plan.

TAUSCHE: Jared, you mentioned that you're not focused on reconciliation and political nose counting and how you actually get to the votes, but which avenue you do choose to get this passed does impact what parts of the President's agenda on other issues you can actually pursue as well. Because reconciliation is not an unlimited tool. You get two shots at it this year, and you'll get one shot at it in future years if there's a budget passed then, too. And so, if you choose to use reconciliation for COVID relief, I'm curious how the administration would choose to use its second opportunity at reconciliation. Is that to expand the public option and to pursue some sort of broader healthcare policy, or is it for the build back better infrastructure and clean energy agenda? Which do you choose?

JARED BERNSTEIN: Well, no, it's interesting you should say infrastructure, because while there is – infrastructure is obviously something that President Biden has worked on his whole career – because we've been focused on the rescue plan, we haven't talked a lot about some of our plans in that regard, although the President has certainly leaned into those investments in the clean energy space. So, I know you asked a political question, let me get to that. I remember testifying in Congress a couple of years ago, and it was about the infrastructure deficit in this country which is, you know, a very, very deep one. In terms of public investments in capital goods and public goods. And after that – and I was quite critical of the Trump administration's lack of an infrastructure plan – and after that testimony to Republicans –  I'm not going to name them because it was a private conversation – pulled me aside and said, we really want to do infrastructure too, but the President doesn't have a plan. So when we're talking about infrastructure, clean energy, childcare, many of the elements of the building back agenda, it is not at all obvious to me that that has to go the route of reconciliation. And if we're talking about infrastructure, it's actually pretty obvious to me that we probably won't. So I wouldn't be so quick to assume that the kind of partisanship would be as deep as maybe folks might think in some of those areas. And again, you know President Biden really is bringing a different climate in terms of political negotiations than existed in this town for the past four years. And while there were definitely differences in that discussion the other night, the American rescue plan – I've talked about some of them already – there was a spirit of shared urgency. And that's going to, I believe, that's going to convey over to the discussion about infrastructure, about climate, about the care agenda, about health care and education. So, I'm, you know, at least until proven otherwise, I'm optimistic.

TAUSCHE: There was a CBO report that we referenced earlier that said that the U.S. economy would get back to pre-pandemic growth by the middle of this year. Not pre-pandemic unemployment until 2024, but each party seems to be reading that in a different way. Republicans say it's proof that there doesn't need to be some sort of large rescue package, but you and Secretary Yellen have both said that it underscores the need for this urgency. But casting the CBO report aside, I'm just curious what data set you are using internally at the White House – as the CEA is what is supposed to inform the President, the White House and policymaking – what data set internally are you using and what does it tell you about when exactly the U.S. economy is going to get back to pre COVID levels?

JARED BERNSTEIN: That's a great question. The answer is not data set. Data sets, plural. I've been perusing as my colleague Heather Boushey as well, and the team have been perusing at least 20 different forecasts. And each one has, you know, probably 10 variables at least in it. So, my head is full of this noise. Now CBO came out yesterday with a forecast that was pretty much around what you'd see kind of in the mainstream if you looked at what's out there. A couple of teams are higher than that, a few are lower. But I think the key thing there from our perspective and you got into this in your question is what do these expectations inform us about our plan? Now, the unemployment rate in the CBO projections that came out yesterday, that's going to remain higher than the pre-crisis projections until 2024. Now, it's important to recognize the CBO included the December relief plan, but of course it doesn't include our plan because that's not, you know, what they do. Our plan is not legislated yet. But that means that millions of people will be unemployed for years after this health threat is behind us, unless we take action now. If we look at the GDP from the CBO report in fact, you are correct, the way you put it about growth rates, but the level of GDP doesn't get back to its potential until 2025, unless we implement the American rescue plan, which pulls both full employment forward by a year and hitting potential GDP forward by more than that. So part one is that the economy will not get back to full employment nearly quickly enough without this plan. Part two is that you can't judge our plan, our success, in fact, I would argue this for pretty much everything we're going to be trying to do in this administration, simply by looking at GDP. Not even looking at the unemployment rate. Those things are necessary but they are not sufficient. Necessary but insufficient. And what do I mean by insufficient? I mean insufficient to reach those in the bottom leg of the K in this K-shaped recovery. For far too many people GDP growth has been a spectator sport for decades on end, and our policies have to recreate the connective tissue so that economic growth generates broadly shared prosperity and racial equity. And that's what this rescue plan is about. And that's what building back better will be about.

TAUSCHE: And that's a good segue Jared to an audience question that I wanted to get to before my final question for you, which is from Lakeisha Williams. She's a senior payroll analyst at Oasis Petroleum and she asks, What are the targeted goals of the new administration to bridge the gap between Wall Street and Main Street? I know we could probably have a 30 minute conversation of our own just about that question, but I'm curious sitting here today, if you had a short punch list of how the administration would plan to tackle that, what would it be?

JARED BERNSTEIN: Yeah, you know, it's a great question from the Lakeisha. I think the problem is quite deep and quite multifaceted. So while, you know, the short punch list – I do have a punch list, I don’t know how short it is. I think the best way to speak about that is in terms of kind of the categories that do precisely what I said in my last answer to you, Kayla, which is to, how do you rebuild the architecture that used to link GDP growth to middle class prosperity for many people but, in fact, never linked GDP growth to the prosperity of persons in communities of color. And that is a multifaceted agenda. It involves making sure that people have access to health care, to childcare. It makes sure that exclusionary zoning in housing is absolutely a thing of the past. It makes sure that every kid can achieve their potential by accessing the quality education they need and not just K through five or eight or 12, but through college and grad school, that's an opportunity agenda. It's an agenda that allows people to realize their economic potential in a way that they've been blocked for years because of racial discrimination – it has been systemic – and because of the kind of disconnections between say Wall Street and the rest of the economy that's implicit in Lakeisha’s question. At the same time, if we don't address some of the structural economic problems that have really hurt the US economy's resiliency, it'll be much harder to get there. So climate change. Climate change is a massive cost, not just on the future economy and on the current economy. So, the Biden plan goes very, very deep in that direction. And again, this is the top level punch list. There are many things that come underneath that. Standing up an accessible childcare sector is another part of that agenda. So that's just some of the ideas that I think help rebuild that connective tissue.

TAUSCHE: And you're certainly going to have your work cut out for you there Jared, but I'm thinking in my final question, I'm recalling the confirmation hearing for Tony Blinken for a Secretary of State where he praised the Trump administration's policy on China. He praised the Abraham accords peace deals in the Middle East and said that a lot of those things he wanted to keep intact and so I'm wondering from an economic perspective, as you're talking about this wholesale structural rebuilding of the American economy, are there any policies from the Trump administration that you think are positive legacies that you think we should keep?

JARED BERNSTEIN: Yeah, it's a great question. You know, I think there's one that I'm not quite sure how to discuss it in the context of the – I think one of the things we learned in the Trump economy, as you know, Kayla, we probably talked about this on the station. I've been extremely critical of the Trump tax cuts. And my main critique, as you know, is that they just shifted hundreds of billions of dollars to folks who are already doing great at the top of the scale very much exacerbating the inequality that I talked about. But at the same time, they did create a certain fiscal pressure. And in tandem with the patience by the Federal Reserve to kind of test the boundaries of some of the metrics that economists used to think couldn't be violated – if we went below 6%, unemployment would start, I mean inflation would start spiraling. And then it was if it went below 5% unemployment, inflation would spiral. Then it was 4%. Well, I think the combination of procyclical fiscal policy and a data-driven Federal Reserve helped deliver an understanding to economists that we can run a hotter labor market than we thought. We can run a hotter economy than we thought. And from the racial equity standpoint that's so important to the Biden/Harris team, that's critical to providing the kind of opportunities I was talking about a second ago and answer to Lakeisha’s question. It's when you get the unemployment rate down to the levels that prevailed pre-crisis that you begin to see opportunities develop for people who are otherwise left behind. So I would say, you know, Trump’s foot on the fiscal accelerator was, you know, really quite terrible in my view from a distributional standpoint. But from the perspective of learning lessons about how hot we can run this economy, actually very important.

TAUSCHE: All right, we'll keep that lesson in mind as hopefully the economy returns to grow this year. For now, Jared, we so appreciate your time today. Jared Bernstein is a member of President Biden's Council of Economic Advisers.

The post Jared Bernstein On The Discussion Around Stimulus appeared first on ValueWalk.

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The SNF Institute for Global Infectious Disease Research announces new advisory board

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in…

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From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

Credit: Lori Chertoff/The Rockefeller University

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

This international advisory board was created in part to give guidance on how to best use SNFiRU’s resources, as well as bring forward innovative ideas concerning new avenues of research, public education, community engagement, and partnership projects.

SNFiRU was established to strengthen readiness for and response to future health crises, building on the scientific advances and international collaborations forged in the context of the COVID-19 pandemic. Launched with a $75 million grant from the Stavros Niarchos Foundation (SNF) as part of its Global Health Initiative (GHI), the institute provides a framework for international scientific collaboration to foster research innovations and turn them into practical health benefits.

SNFiRU’s mission is to better understand the agents that cause infectious disease and to lower barriers to treatment and prevention globally. To speed this work, the institute launched numerous initiatives in its inaugural year. For instance, SNFiRU awarded 31 research projects in 29 different Rockefeller laboratories for over $5 million to help get collaborative new research efforts off the ground. SNFiRU also supports the Rockefeller University Hospital, where clinical studies are conducted, and brought on board its first physician-scientist through Rockefeller’s Clinical Scholars program. “One of the surprises was the scope of interest from Rockefeller scientists in using their talents to tackle important infectious disease problems,” says Charles M. Rice, Maurice R. and Corinne P. Greenberg Professor in Virology at Rockefeller and director of SNFiRU. “The research topics range from the biology of infectious agents to the dynamics of the immune response to pathogens, and also include a number of infectious disease-adjacent studies.”

In the past 12 months, SNFiRU often brought together scientists studying different aspects of infectious disease as a way to spur new collaborations. In addition to hosting its first annual day-long symposium, SNFiRU initiated a Young Scientist Forum for students and post-doctoral fellows to meet regularly, facilitating cross-laboratory thinking. A bimonthly seminar series has also been established on campus.

Another aim of SNFiRU is to develop relationships with community-based organizations, as well as design and participate in community-engaged research, with a focus on low-income and minority communities. To that end, SNFiRU is helping develop a research project on Chagas disease, a tropical parasitic infection prevalent in Latin America that can cause congestive heart failure and gastrointestinal complications if left untreated. The project will bring together clinicians practicing at health centers in New York, Florida, Texas, and California and basic scientists from multiple institutions to help the communities that are most impacted.

“The SNFiRU international advisory board convenes globally recognized leaders with distinguished biomedical expertise, unrivalled experience in pandemic preparedness and response, and a shared commitment to translating scientific advancements into equitably distributed benefits in real-world settings,” says SNF Co-President Andreas Dracopoulos. “The advisory board will advance the institute’s indispensable mission, which SNF is proud to support as a key part of our Global Health Initiative, and we look forward to seeing breakthroughs in the lab drive better outcomes in lives around the globe.”

The new advisory board will hold its first meeting on April 11th, 2024, following the second annual SNF Institute for Global Infectious Disease Research Symposium at Rockefeller.

Its members are: Rafi Ahmed of Emory University School of Medicine, Cori Bargmann of The Rockefeller University, Yasmin Belkaid of the Pasteur Institute, Anthony S. Fauci, the former director of the National Institute of Allergy and Infectious Diseases, Peter Hotez of Baylor College of Medicine and Texas Children’s Hospital Center for Vaccine Development, Esper Kallas of of the Butantan Institute, Sharon Lewin of the University of Melbourne Doherty Institue, Carl Nathan of Weill Cornell Medicine, Rino Rappuoli of Fondazione Biotecnopolo di Siena and University of Siena, and Herbert “Skip” Virgin of Washington University School of Medicine and UT Southwestern Medical Center.

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Congress’ failure so far to deliver on promise of tens of billions in new research spending threatens America’s long-term economic competitiveness

A deal that avoided a shutdown also slashed spending for the National Science Foundation, putting it billions below a congressional target intended to…

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Science is again on the chopping block on Capitol Hill. AP Photo/Sait Serkan Gurbuz

Federal spending on fundamental scientific research is pivotal to America’s long-term economic competitiveness and growth. But less than two years after agreeing the U.S. needed to invest tens of billions of dollars more in basic research than it had been, Congress is already seriously scaling back its plans.

A package of funding bills recently passed by Congress and signed by President Joe Biden on March 9, 2024, cuts the current fiscal year budget for the National Science Foundation, America’s premier basic science research agency, by over 8% relative to last year. That puts the NSF’s current allocation US$6.6 billion below targets Congress set in 2022.

And the president’s budget blueprint for the next fiscal year, released on March 11, doesn’t look much better. Even assuming his request for the NSF is fully funded, it would still, based on my calculations, leave the agency a total of $15 billion behind the plan Congress laid out to help the U.S. keep up with countries such as China that are rapidly increasing their science budgets.

I am a sociologist who studies how research universities contribute to the public good. I’m also the executive director of the Institute for Research on Innovation and Science, a national university consortium whose members share data that helps us understand, explain and work to amplify those benefits.

Our data shows how underfunding basic research, especially in high-priority areas, poses a real threat to the United States’ role as a leader in critical technology areas, forestalls innovation and makes it harder to recruit the skilled workers that high-tech companies need to succeed.

A promised investment

Less than two years ago, in August 2022, university researchers like me had reason to celebrate.

Congress had just passed the bipartisan CHIPS and Science Act. The science part of the law promised one of the biggest federal investments in the National Science Foundation in its 74-year history.

The CHIPS act authorized US$81 billion for the agency, promised to double its budget by 2027 and directed it to “address societal, national, and geostrategic challenges for the benefit of all Americans” by investing in research.

But there was one very big snag. The money still has to be appropriated by Congress every year. Lawmakers haven’t been good at doing that recently. As lawmakers struggle to keep the lights on, fundamental research is quickly becoming a casualty of political dysfunction.

Research’s critical impact

That’s bad because fundamental research matters in more ways than you might expect.

For instance, the basic discoveries that made the COVID-19 vaccine possible stretch back to the early 1960s. Such research investments contribute to the health, wealth and well-being of society, support jobs and regional economies and are vital to the U.S. economy and national security.

Lagging research investment will hurt U.S. leadership in critical technologies such as artificial intelligence, advanced communications, clean energy and biotechnology. Less support means less new research work gets done, fewer new researchers are trained and important new discoveries are made elsewhere.

But disrupting federal research funding also directly affects people’s jobs, lives and the economy.

Businesses nationwide thrive by selling the goods and services – everything from pipettes and biological specimens to notebooks and plane tickets – that are necessary for research. Those vendors include high-tech startups, manufacturers, contractors and even Main Street businesses like your local hardware store. They employ your neighbors and friends and contribute to the economic health of your hometown and the nation.

Nearly a third of the $10 billion in federal research funds that 26 of the universities in our consortium used in 2022 directly supported U.S. employers, including:

  • A Detroit welding shop that sells gases many labs use in experiments funded by the National Institutes of Health, National Science Foundation, Department of Defense and Department of Energy.

  • A Dallas-based construction company that is building an advanced vaccine and drug development facility paid for by the Department of Health and Human Services.

  • More than a dozen Utah businesses, including surveyors, engineers and construction and trucking companies, working on a Department of Energy project to develop breakthroughs in geothermal energy.

When Congress shortchanges basic research, it also damages businesses like these and people you might not usually associate with academic science and engineering. Construction and manufacturing companies earn more than $2 billion each year from federally funded research done by our consortium’s members.

A lag or cut in federal research funding would harm U.S. competitiveness in critical advanced technologies such as artificial intelligence and robotics. Hispanolistic/E+ via Getty Images

Jobs and innovation

Disrupting or decreasing research funding also slows the flow of STEM – science, technology, engineering and math – talent from universities to American businesses. Highly trained people are essential to corporate innovation and to U.S. leadership in key fields, such as AI, where companies depend on hiring to secure research expertise.

In 2022, federal research grants paid wages for about 122,500 people at universities that shared data with my institute. More than half of them were students or trainees. Our data shows that they go on to many types of jobs but are particularly important for leading tech companies such as Google, Amazon, Apple, Facebook and Intel.

That same data lets me estimate that over 300,000 people who worked at U.S. universities in 2022 were paid by federal research funds. Threats to federal research investments put academic jobs at risk. They also hurt private sector innovation because even the most successful companies need to hire people with expert research skills. Most people learn those skills by working on university research projects, and most of those projects are federally funded.

High stakes

If Congress doesn’t move to fund fundamental science research to meet CHIPS and Science Act targets – and make up for the $11.6 billion it’s already behind schedule – the long-term consequences for American competitiveness could be serious.

Over time, companies would see fewer skilled job candidates, and academic and corporate researchers would produce fewer discoveries. Fewer high-tech startups would mean slower economic growth. America would become less competitive in the age of AI. This would turn one of the fears that led lawmakers to pass the CHIPS and Science Act into a reality.

Ultimately, it’s up to lawmakers to decide whether to fulfill their promise to invest more in the research that supports jobs across the economy and in American innovation, competitiveness and economic growth. So far, that promise is looking pretty fragile.

This is an updated version of an article originally published on Jan. 16, 2024.

Jason Owen-Smith receives research support from the National Science Foundation, the National Institutes of Health, the Alfred P. Sloan Foundation and Wellcome Leap.

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What’s Driving Industrial Development in the Southwest U.S.

The post-COVID-19 pandemic pipeline, supply imbalances, investment and construction challenges: these are just a few of the topics address by a powerhouse…

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March 13, 2024

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The post-COVID-19 pandemic pipeline, supply imbalances, investment and construction challenges: these are just a few of the topics address by a powerhouse panel of executives in industrial real estate this week at NAIOP’s I.CON West in Long Beach, California. Led by Dawn McCombs, principal and Denver lead industrial specialist for Avison Young, the panel tackled some of the biggest issues facing the sector in the Western U.S. 

Starting with the pandemic in 2020 and continuing through 2022, McCombs said, the industrial sector experienced a huge surge in demand, resulting in historic vacancies, rent growth and record deliveries. Operating fundamentals began to normalize in 2023 and construction starts declined, certainly impacting vacancy and absorption moving forward.  

“Development starts dropped by 65% year-over-year across the U.S. last year. In Q4, we were down 25% from pre-COVID norms,” began Megan Creecy-Herman, president, U.S. West Region, Prologis, noting that all of that is setting us up to see an improvement of fundamentals in the market. “U.S. vacancy ended 2023 at about 5%, which is very healthy.” 

Vacancies are expected to grow in Q1 and Q2, peaking mid-year at around 7%. Creecy-Herman expects to see an increase in absorption as customers begin to have confidence in the economy, and everyone gets some certainty on what the Fed does with interest rates. 

“It’s an interesting dynamic to see such a great increase in rents, which have almost doubled in some markets,” said Reon Roski, CEO, Majestic Realty Co. “It’s healthy to see a slowing down… before [rents] go back up.” 

Pre-pandemic, a lot of markets were used to 4-5% vacancy, said Brooke Birtcher Gustafson, fifth-generation president of Birtcher Development. “Everyone was a little tepid about where things are headed with a mediocre outlook for 2024, but much of this is normalizing in the Southwest markets.”  

McCombs asked the panel where their companies found themselves in the construction pipeline when the Fed raised rates in 2022.   

In Salt Lake City, said Angela Eldredge, chief operations officer at Price Real Estate, there is a typical 12-18-month lead time on construction materials. “As rates started to rise in 2022, lots of permits had already been pulled and construction starts were beginning, so those project deliveries were in fall 2023. [The slowdown] was good for our market because it kept rates high, vacancies lower and helped normalize the market to a healthy pace.” 

A supply imbalance can stress any market, and Gustafson joked that the current imbalance reminded her of a favorite quote from the movie Super Troopers: “Desperation is a stinky cologne.” “We’re all still a little crazed where this imbalance has put us, but for the patient investor and owner, there will be a rebalancing and opportunity for the good quality real estate to pass the sniff test,” she said.  

At Bircher, Gustafson said that mid-pandemic, there were predictions that one billion square feet of new product would be required to meet tenant demand, e-commerce growth and safety stock. That transition opened a great opportunity for investors to run at the goal. “In California, the entitlement process is lengthy, around 24-36 months to get from the start of an acquisition to the completion of a building,” she said. Fast forward to 2023-2024, a lot of what is being delivered in 2024 is the result of that chase.  

“Being an optimistic developer, there is good news. The supply imbalance helped normalize what was an unsustainable surge in rents and land values,” she said. “It allowed corporate heads of real estate to proactively evaluate growth opportunities, opened the door for contrarian investors to land bank as values drop, and provided tenants with options as there is more product. Investment goals and strategies have shifted, and that’s created opportunity for buyers.” 

“Developers only know how to run and develop as much as we can,” said Roski. “There are certain times in cycles that we are forced to slow down, which is a good thing. In the last few years, Majestic has delivered 12-14 million square feet, and this year we are developing 6-8 million square feet. It’s all part of the cycle.”  

Creecy-Herman noted that compared to the other asset classes and opportunities out there, including office and multifamily, industrial remains much more attractive for investment. “That was absolutely one of the things that underpinned the amount of investment we saw in a relatively short time period,” she said.  

Market rent growth across Los Angeles, Inland Empire and Orange County moved up more than 100% in a 24-month period. That created opportunities for landlords to flexible as they’re filling up their buildings. “Normalizing can be uncomfortable especially after that kind of historic high, but at the same time it’s setting us up for strong years ahead,” she said. 

Issues that owners and landlords are facing with not as much movement in the market is driving a change in strategy, noted Gustafson. “Comps are all over the place,” she said. “You have to dive deep into every single deal that is done to understand it and how investment strategies are changing.” 

Tenants experienced a variety of challenges in the pandemic years, from supply chain to labor shortages on the negative side, to increased demand for products on the positive, McCombs noted.  

“Prologis has about 6,700 customers around the world, from small to large, and the universal lesson [from the pandemic] is taking a more conservative posture on inventories,” Creecy-Herman said. “Customers are beefing up inventories, and that conservatism in the supply chain is a lesson learned that’s going to stick with us for a long time.” She noted that the company has plenty of clients who want to take more space but are waiting on more certainty from the broader economy.  

“E-commerce grew by 8% last year, and we think that’s going to accelerate to 10% this year. This is still less than 25% of all retail sales, so the acceleration we’re going to see in e-commerce… is going to drive the business forward for a long time,” she said. 

Roski noted that customers continually re-evaluate their warehouse locations, expanding during the pandemic and now consolidating but staying within one delivery day of vast consumer bases.  

“This is a generational change,” said Creecy-Herman. “Millions of young consumers have one-day delivery as a baseline for their shopping experience. Think of what this means for our business long term to help our customers meet these expectations.” 

McCombs asked the panelists what kind of leasing activity they are experiencing as a return to normalcy is expected in 2024. 

“During the pandemic, shifts in the ports and supply chain created a build up along the Mexican border,” said Roski, noting border towns’ importance to increased manufacturing in Mexico. A shift of populations out of California and into Arizona, Nevada, Texas and Florida have resulted in an expansion of warehouses in those markets. 

Eldridge said that Salt Lake City’s “sweet spot” is 100-200 million square feet, noting that the market is best described as a mid-box distribution hub that is close to California and Midwest markets. “Our location opens up the entire U.S. to our market, and it’s continuing to grow,” she said.   

The recent supply chain and West Coast port clogs prompted significant investment in nearshoring and port improvements. “Ports are always changing,” said Roski, listing a looming strike at East Coast ports, challenges with pirates in the Suez Canal, and water issues in the Panama Canal. “Companies used to fix on one port and that’s where they’d bring in their imports, but now see they need to be [bring product] in a couple of places.” 

“Laredo, [Texas,] is one of the largest ports in the U.S., and there’s no water. It’s trucks coming across the border. Companies have learned to be nimble and not focused on one area,” she said. 

“All of the markets in the southwest are becoming more interconnected and interdependent than they were previously,” Creecy-Herman said. “In Southern California, there are 10 markets within 500 miles with over 25 million consumers who spend, on average, 10% more than typical U.S. consumers.” Combined with the port complex, those fundamentals aren’t changing. Creecy-Herman noted that it’s less of a California exodus than it is a complementary strategy where customers are taking space in other markets as they grow. In the last 10 years, she noted there has been significant maturation of markets such as Las Vegas and Phoenix. As they’ve become more diversified, customers want to have a presence there. 

In the last decade, Gustafson said, the consumer base has shifted. Tenants continue to change strategies to adapt, such as hub-and-spoke approaches.  From an investment perspective, she said that strategies change weekly in response to market dynamics that are unprecedented.  

McCombs said that construction challenges and utility constraints have been compounded by increased demand for water and power. 

“Those are big issues from the beginning when we’re deciding on whether to buy the dirt, and another decision during construction,” Roski said. “In some markets, we order transformers more than a year before they are needed. Otherwise, the time comes [to use them] and we can’t get them. It’s a new dynamic of how leases are structured because it’s something that’s out of our control.” She noted that it’s becoming a bigger issue with electrification of cars, trucks and real estate, and the U.S. power grid is not prepared to handle it.  

Salt Lake City’s land constraints play a role in site selection, said Eldridge. “Land values of areas near water are skyrocketing.” 

The panelists agreed that a favorable outlook is ahead for 2024, and today’s rebalancing will drive a healthy industry in the future as demand and rates return to normalized levels, creating opportunities for investors, developers and tenants.  

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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