Industrial Real Estate Trends: Why We’re on the Verge of a Boom in Construction

[00:00:00.000] David.

[00:00:00.490] It’s the real end of the week.

[00:00:02.090] It’s the end of the week. Yeah, and for once, we’re actually recording this at the end of the week.

[00:00:06.540] Yeah, it’s actually a few hours left.

[00:00:08.480] How are you doing?

[00:00:09.150] I’m doing good. You?

[00:00:10.030] Very good. Looking forward to the weekend. I’ve been on the road leaving Sunday mid-afternoon for five weeks now. This will be my first full weekend. At home. At home.

[00:00:25.150] Good for you. It’s going to rain the entire time.

[00:00:27.580] You know what it really is for me?

[00:00:30.030] It’s good because you like walking in the rain.

[00:00:32.160] And I like buying vegetables that I’m confident I will eat that week because I’m not on the road. Because you’re around. And then there’s just the whole, as you know, if the camera adds 10 pounds, four weeks of travel in a row also adds 10 pounds. So I’m actually much skinnier in real life than I look right now because I look 20 pounds overweight. Because you just can’t. You I just can’t do it. I deeply respect the quinoa folks who have the discipline to eat extremely carefully while they’re on the road. I have an enormous respect for it. It just isn’t me. I was in Texas.

[00:01:19.250] No, there’s no way you should even try. It would be a shame.

[00:01:22.960] I’m having beer and barbecue. You know what I mean? I’m not going there and not. It’s not like I did it every day. I had one good blowout beer barbecue with macaroni. As you should. Okay, good.

[00:01:38.490] Just a quick story on eating well. My wife got a salad book for Christmas.

[00:01:45.140] Christmas or something, yeah.

[00:01:46.010] So we said, we’ll do this salad. The first one, and she didn’t do it for a while, but recently, the two first salad she did, the first one was a salad with chicken wrapped in Doritos. And the second one was the smoked meat sandwich with chips and pickles. So I’ve been eating healthy.

[00:02:05.660] Salads you will love.

[00:02:06.710] Yeah, exactly. All right. So this week’s behind the headlines, we’re going to talk about… Well, the headline is, Coal Storage, construction starts are falling.

[00:02:18.090] And where’d that come from? Supply Chain 24/7 magazine. Yeah. One of the hottest publications in the industry.

[00:02:26.960] Yes.

[00:02:27.720] And so you’re saying, Hey, Coal Cold Storage construction starts are falling. Now, can I say something? That is the most…

[00:02:40.050] Bizarrely written…

[00:02:41.630] Headline? Yeah. It is. It’s a mouthful to say it because it’s cold storage construction starts, right? It’s not the verb. So it’s hard to say it. But it’s also when you read the article, one of the most subduced food headline I’ve ever read. Do you know how most headlines in the world is like, Tariffs are going to end the economy. And then you read it and you think, Well, not really. This one, it says, Well, cold storage construction starts or falling. And you say, Well, okay, so what? And then you read that, well, they’re falling so drastically for so many years now. And I think a lot of people don’t understand that. So this We’re only talking about cold storage for now. But just to put it in perspective, in 2022, the United States was building about 716 million square feet of cold storage. And immediately in 2023, that dropped by 37 %. So it’s like, whatever, 7: 16 to under 500. It’s an enormous drop. That’s not a three % That’s a free fall. I would have said the skies are falling in the headline instead of, they’re falling. But anyway, so this is something vacancy peaked in 2023, but Actually, that’s not true.

[00:04:16.740] They continued to increase somewhat. And it meant that even in 2024, construction starts on cold storage projects are low. And this correlates with an article I read, I don’t know, six months, eight months ago, which was 2023 general industrial space construction was the starts in terms of total square feet being built, not just cold storage, but all types of industrial facilities. It was lower than 2013 starts. So it was like a decade of growth had been completely wiped out and they were back down. So now that actually sounds like a doomsday scenario. And I think, I don’t know how you feel, but I would say, actually, yeah, it hasn’t been a terrific stretch for folks building and those of us who helped design warehouses. So the question is, what happened? Is this the harbinger of a depression? I would say, obviously not. It’s been two years in the making. It’s two years of this, and nothing else has fallen in the economy. So it’s not a leading indicator of something. It’s actually, well, I don’t know if you want to talk about it.

[00:05:45.950] No. Yes, a leading indicator. But you’re the one who said or you were telling me that you felt this space has been in a recession for a while, probably around this.

[00:06:03.100] And this data just confirms that. It’s eight quarters of decrease in construction starts.

[00:06:12.640] So the question… Well, there are many questions, or if we want to ask the question, why is this happening? What is the reason? And we could think about the reduction in demand. Is it because we overbuilt during COVID? Is it because the developers have least confidence and are doing less of the speculative construction? What’s your take on this?

[00:06:43.270] It’s clearly overbuilding it during COVID. It’s speculative overbuilding during COVID. We all have to remember, we were chanting, New Normal, this is a new normal. This is a new normal. And so the world was never going to go back to… We were never going to in a store again. Everything was going to be online. Now that we were forced to order online, our entire lives were going to be shopping online. And as a result, there was a massive build of industrial space, which turned out to be completely unnecessary once we were allowed to go back into stores. Because it turns out, like Jorge Romero’s Dawn of the Dead, the zombies go where they’re happiest. So they return to the shopping mall and just wander around the shopping mall because that’s what we like to do on a rainy Saturday afternoon when you don’t have to take a flight to Austin the next day.

[00:07:42.460] Yeah, correct. Because that’s true also Well, and it’s highly correlated with the online grocery, where a lot of businesses were, and some of our clients, trying to figure out what’s the strategy to adopt and the investments that need to be made. And this because the indicators were hard to interpret. But still, too much was built during that time for sure. Yeah.

[00:08:12.510] And so now you think about it, okay? You have this hyper excitement in the e-commerce world that led to a bunch of facilities being built, all of them with the dreams of being a last mile facility or not even, maybe just a national distributor of some sort. But if you are building, let’s say 10 or 15 % more construction over a period of three years, and I think in COVID, it probably would have been two years of 50 %… If your warehouse starts, construction starts, is so massively over the normal rate of construction and growth, well Well, then what happens when the real demand returns to normal, is you get all this empty warehouse space, whether it’s cold storage or normal, that then must get absorbed by demand. And that’s what’s happening, and that’s what’s happened. I would say, I would love your take on this, over the next little while, do you feel there’s a change now?

[00:09:30.020] In what sense? The change about?

[00:09:31.470] Okay, let me put it this way. My sense, looking at the first quarter of 2025, is the signals-Right.

[00:09:40.470] If we achieve the bottom of the slow down- The nadir, the minimum. I think we’re very close to, I’ll say, it’s not the new normal, but back to normal, the real normal. Yeah, I think so. I think so we’re Sure.

[00:10:00.340] That’s my impression is that from the signals we’re getting from the market and from our clients, that construction is about to return to its normal pace. So again, you think about it, you You get back to normal, which means you’re going to go through a few years of underbuild, you get back to normal, which doesn’t necessarily mean you’re doing the, whatever, a 500 million square feet of cold storage facilities this year, but maybe you’re doing 400 and And the market is starting to tighten and require space in a way. The market is tightening and vacancies are- Back to normal. Yeah, right. Are falling back to normal.

[00:10:42.730] Because that’s excessive speculation on construction was… I mean, it makes sense or you can understand that it happened because vacancy rate were so low that you need… Like in a warehouse, you need a buffer, right? You need empty space in order for companies to evolve and move and go in.

[00:11:04.970] Exactly.

[00:11:05.140] So that vacancy was so low, below what is acceptable, that there was this gold rush of Building the space.

[00:11:16.180] And then there’s a flip side to this that I find interesting is now let’s talk about what’s going into the buildings. So even though the total number of square footage Not the inventory. No, the equipment. The total number of square footage has… The amount of construction dropped like a rock, and that’s 37 % drop. It’s a devastating drop for All of the folks that we deal with in the construction industry who are building the buildings we’re designing. I mean, this is not happy times. This is economic depression, levels of misery.

[00:11:58.040] It means almost no work for some businesses in that field.

[00:12:01.980] Right. But inside the equipment side of things, the rate of growth in terms of spending on automation and sophisticated material handling systems is growing at a pace that’s much faster than it has ever been, even though the number of the square footage is not… Yeah. So it’s actually it’s masking the… It makes it look like if the rate of growth, I think Somebody said here, it’s like two and a half times. We expect over the next 10 years the amount of annual spend on automation to grow by two and a half times. But if you set that against a shrinking-So where is that equipment going? It just shows you that per square foot, the amount of dollars of equipment, of material handling equipment per square foot is shooting up. And that I find fascinating fascinating.

[00:13:00.480] Which is one of the argument where asking the question, do you think we’ve hit a period where it’s going to go back? Well, we see that on the equipment that, yeah, there’s definitely activity and demand for it.

[00:13:14.740] Yeah. And in fact, they did this survey. And the respondents have being asked, why are they spending literally 10 times the amount per square foot on equipment than they had previously? And 67 % of them cite a better capacity utilization. Whether they’re achieving that or not, we’ll let them. But that is at least the rationale, is how do they avoid construction? How do they squeeze more out of every square foot that they do control today and will control as they move into new buildings? Yeah, correct. I’m fascinating.

[00:13:56.190] Yeah, very interesting. And no, there’s no Yeah.

[00:14:00.590] I mean, we don’t have to take it much longer than that.

[00:14:04.370] Because it’s Friday.

[00:14:05.470] It’s Friday. And it was a headline that grabbed us. I mean, it’s something like I said, as you mentioned, I felt it for a while and I would describe it as a as a recession, when you just think of the number of facilities we were building, we were putting together at Lid for our clients during COVID, it was insane. And then, it’s not that nothing happens, but it dropped off and it was interesting. And then when you get the stats and they say, well, looking back on it, yeah, that’s exactly what happened.

[00:14:40.020] But now that you’ve mentioned that it is true, the nature of the work we do at a more, not a micro level, but obviously what we do is help with capacity, productivity, and all this. But what that means and the specific work we do for clients, whether a new building or it’s around capacity or no, it’s around efficiency, has not shifted, but the balance between these type of mandates have changed in the last couple of years.

[00:15:13.080] Efficiency has dominated and capacity has fallen. And yet this quarter, it feels like people are now starting to think about capacity issues. Well, great. I mean, look. Oh, well, yeah, we’re done. We’ve done it. It’s over.

[00:15:31.510] Have a great weekend. You, too. All.