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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…



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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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…



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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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…




 - 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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A Year-End Rally In Europe Seems Like Wishful Thinking

A Year-End Rally In Europe Seems Like Wishful Thinking

By Michael Msika, Bloomberg Markets Live reporter and strategist

Soaring bond yields,…



A Year-End Rally In Europe Seems Like Wishful Thinking

By Michael Msika, Bloomberg Markets Live reporter and strategist

Soaring bond yields, a conflict in the Middle East and a tricky earnings season to navigate have cemented market strategists’ view that a year-end rally in European stocks isn’t on the cards.

The Stoxx Europe 600 index is expected to end the year at 450 points, according to the average of 16 strategists in a Bloomberg survey — just 1% above Wednesday’s close. Britain’s FTSE 100 is forecast to end 2023 pretty much where it is now, while the Euro Stoxx 50 and Germany’s DAX are seen rising by less than 3%.

With the global economy expected to slow, and with so many moving parts in the market, the average target hasn’t changed much from predictions made a month ago. Among those surveyed, the two most bearish firms — Bank of America and TFS — raised their targets by as much as 5%, while four firms cut their forecasts by a similar magnitude.

"With the relative valuation of equities to bonds at levels not seen since the great financial crisis, and earnings momentum in negative territory, we expect European equities to remain under pressure from any further increase in bond yields,” says Societe Generale head of European equity strategy Roland Kaloyan. He reiterated his Stoxx 600 year-end target of 440 points, but expects further downside in the first half of 2024 as the economy weakens.

For many strategists, stocks will be in a holding pattern while bond yields remain high, and the earnings season just kicking off has the potential to disappoint.

“The European macro backdrop has been weakening for some time and the third quarter was no exception,” says UBS strategist Gerry Fowler. He says results may show company margins are starting to contract as the economy stalls. “More sectors are not only reporting very weak new orders but also more recently, weakening backlogs of work too. This is a sign of imminent profit warnings.”

At the same time, the recent spike in bond yields is unlikely to reverse quickly, implying valuations are now slightly expensive in Europe. “Valuations can’t bail out weaker earnings until we are closer to ECB/Fed rate cuts in the middle of 2024,” Fowler says.

This round of forecasts comes after almost three months of declines for European stocks. The market has been paring its year-to-date gain amid a steep bond selloff that sent US benchmark Treasury yields to the highest level since July 2007, causing cracks for equities. Economic data has also been a headwind, with contracting PMIs in Europe and disappointing numbers out of China.

The latest risk that strategists are considering is war in the Middle East. While it isn’t seen as a significant threat to markets by most, it is an additional risk in the event of a major escalation.

“The geopolitical risk premium is unlikely to go away quickly,” say Barclays strategists led by Emmanuel Cau. He recommended that investors look at hedges like increasing allocation to energy, and reiterated a 490 target for the Stoxx 600. That’s the highest in the survey and implies a 10% rally into year end.

On the buy-side, investors are still bearish in the near term. The Bank of America fund manager survey in October showed that 55% see downside for European equities over the next few months because of high interest rates and falling earnings in the region. Still, more than half expect some upside over the next year.

BofA strategists are also cautious on the trajectory of earnings in the region. They see nearly 15% downside for the Stoxx 600 12-month forward EPS by the third quarter of next year, with strategists led by Sebastian Raedler saying that weakening global growth momentum and fading inflation support are growing headwinds. Their 410 target for the Stoxx 600 implies about 8% downside.

Tyler Durden Fri, 10/20/2023 - 12:25

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