[co-author: Michael Longo]
Across California, the industrial sector is moving in a positive direction, with demand growing faster than supply in both Northern and Southern California. Even tariffs or the threat of tariffs have not dampened enthusiasm, with imports remaining steady in April and slightly down in May, according to Michael Longo, senior vice president at CBRE. Allen Matkins Partner, Spencer B. Kallick sat down with Michael to discuss trends in the industrial sector.
Spencer B. Kallick
Many would say that it’s difficult to get deals done right now. How are you able to buck that trend? Is there a special sauce?
Michael Longo
There's no special sauce. In good times and bad times, there is always going to be some deal volume. Where it gets tricky is in those periods of change, and when the Fed started raising rates, that brought about one of those big periods of change. We’re still in that period, and it continues to be really challenging to transact because people are reevaluating and re-underwriting their positions. Everyone keeps thinking, “It’s going to get better,” but that hasn’t happened yet, and no one knows when it will. I think it’s already getting better, but I’m an optimist.
SBK
How are tariffs impacting the industrial sector?
ML
It’s complicated. The first week of April, we saw a little bit of a shock, a little bit of a hard breath, but we track all of the deals in the sector, and we didn't see that much immediate impact. We saw some investors take a pause, but the import statistics really aren’t that bad. May was just released, and there was about a 20% decrease; and in April, imports were actually up. We won’t really know the full impact until later in the Summer or Fall. Overall, the stats are a lot better than I thought they would be. You can't change the supply chain overnight.
SBK
What are the trends you're seeing in data centers?
ML
The question mark on all data center developments is 15 to 20 years from now, when your lease expires, what do you have, and is there value there? And I think there might not be value when we look at the actual buildings themselves, because it might not be based on the buildings themselves. The infrastructure of generators and backup power will become dated over 20 years. So they may need to be replaced, but is the actual sourcing of the power to that location, does that intrinsically have value? And that's the question. I don't think anyone in that space can fully answer that question.
SBK
A lot of cities that used to be industrial towns are now saying that they don’t want warehousing or manufacturing. How much of that are you seeing?
ML
Pretty much every single deal we're working on! Again, you asked a question earlier about these adaptive reuse projects from office to industrial or housing. This happens even in the utilization of an existing building. Is the city going to rip your rights to industrial use out from underneath you? You might think that you're in the clear, but it turns out you can't operate there. We’re working on a building right now that just got the zoning changed underneath it. This building was built as a distribution logistics building, but the city doesn’t want trucking. These developments may force businesses to think about relocating elsewhere, moving them out of those locations to other parts of the country. It may make those cities suffer in the interim. I think if it really does start impacting business decisions, the cities may change their minds. But how do you make an investment decision based on that? It's really hard.
SBK
What are you seeing in the e-commerce space? Who are the bigger players and what does it look like a couple of years into the future?
ML
If you look at the penetration of e-commerce in retail, we’re at about 20%. If you look at Europe, they're in the upper thirties. So, we still think that there is room to grow another 10% over the next three years. That penetration of e-commerce is a real trend that doesn't seem to be ending. Amazon certainly was in the game early, and now every other retailer has to build e-commerce into their systems. Developers view it as a growth area for sure.
Amazon has shifted into building automated facilities. They are working on a three million square-foot building in the high desert right now, which will act as their sorting facility that will source their last-mile facility. They are ahead of everyone else in the space right now.
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