With a holiday lull fast approaching, I had the opportunity to lunch with a dear friend, Rob Neal of Hager Pacific Properties.
Rob and I have known each other since we had different colored hair, but I digress. Our time together was a chance to measure our collective gauge on the commercial real market and enjoy a bit of Christmas cheer.
For all three of you who don’t know Rob, he’s a managing partner with Hager and oversees the firm’s acquisitions, renovations and dispositions. Hager specializes in buying properties suitable for a long term hold to the aging, vacant, environmentally impacted, or under-performing. Its portfolio has nearly 120 properties in some 14,000,000 square feet.
Serenaded by Christmas carolers as I arrived at our meeting spot, my mind recalled another lunch with Rob on March 9, 2020. The pandemic was becoming a thing, and Rob was particularly melancholy that day. His normally upbeat outlook on the future was quite dark. Because Rob was concerned, I became nervous.
Four days later our state was locked down. Wow! He was quite prescient.
Some 21 months hence, we’ve seen rents increase 37.2%, industrial demand soar off the charts, a constricted supply chain and we’ve each got one new grandchild.
Could Rob have possibly predicted the favor manufacturing and logistics buildings have enjoyed? A resounding no, he said. But his why is what I found most illustrative.
Certainly, people are buying more online. But Rob described it like this: We have – and are continuing – to rebuild our supply chain. Here’s how.
Not so long ago, we visited very expensive warehouse spaces filled with stuff. In these buildings – the ceilings weren’t particularly tall, the loading was a bit compromised, but they were well located on busy intersections. We as shoppers bought, loaded and transported the purchases to our homes.
Predominant on the building’s front, on all paper bags and carts were names such as Von’s, Ralphs and Albertsons. Yes! Your local grocer.
Rob said the biggest change he observed during the pandemic was that folks our age (let’s politely say 50-ish) joined the Amazon party and our generation started ordering food online. At first, it was because we didn’t have a choice. But once we got a familiarity with the simplicity and ease, we became believers.
Hmmm. What else can we order and have on our doorstep tomorrow? Everything but the kitchen sink! As a matter of fact – the kitchen sink also – Kohler, Kraus – you name it.
So why the meteoric rise in lease rates? Rob believes – as do I – that it’s purely supply and demand. We’ve endured limited availability of space, an acute lack of new development – supply, coupled with rebuilding our supply chain – demand. Larger, taller, and more centralized are the e-commerce distribution centers with the flagship Amazon adding 300 new warehouses in 2021.
Let’s call it a voracious appetite with no Christmas leftovers.
When does it end? Rob and I read with interest the Chapman Economic forecast published last week.
Economists at the university anticipate a rise in borrowing costs will cool the sizzling homebuying binge and result in price depreciation of 3% in 2022. Expect, according to Chapman, a recession in 2023. The culprit? Rising interest rates.
Rob’s take was a bit more granular. He mentioned the 50,000,000 square feet of new industrial development in Dallas. After all, how will they house the exodus from California? Building often is easier outside California, and Rob believes this “over-built” episode will cause price concessions.
Something none of us foresees could also derail us. Like a 100-year pandemic? OK, that’s a bad example, but you get the idea.
Belated Merry Christmas to you all. I hope you enjoyed the lunch chat as much as I did.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
