Archives for July 2021

Introduction

Logistics conjures images of the brown UPS delivery vehicle from the 1980s for most baby boomers. For younger generations, though, logistics is an often used—but mostly misunderstood—term that impacts all MSAs and commercial property types from housing to retail stores and warehouses. The term came back into focus during the Trump-era 2019 tariffs that disrupted supply-chains for everything from Canadian lumber and Asian steel to what seemed like all that found its way into a Walmart store; however, logistics is now the item we use to explain COVID-era supply-chain disruption. It is also what the Federal Reserve now blames for “Transitory Inflation.” So, what is this thing we call logistics, and why is it a 2021-22 Top Ten Issue Affecting Real Estate?

Logistics is simply the relay race that materials and goods compete in every day moving across intermodal transportation (land, sea, and air cargo) to the end-user, be it a business (B2B) or consumer (B2C), and commercial real estate is the field on which it all plays out. Whether it’s a port, rail line, pipeline (such as the now infamous Colonial gas pipeline), manufacturing facility, warehouse, farm or ranch (that are increasingly owned institutionally, according to the NCREIF Farmland Index), or grocery store, all these real estate assets are a critical segment in the supply-chain relay race that is logistics.¹ How logistics is functioning impacts the utilization of commercial real estate. That is why logistics is a Top Ten Issue.

The Evolving Logistics Model

Modern-day Logistics is rooted in a process developed during WWII to move and supply troops. World War II is the quintessential historical example underscoring the significance of supply chain logistics. In a June CCIM Institute Insights paper titled “Last-Mile Logistics: Commercial Real Estate’s Growth Engine”, I explain that in the 1940s,

“troops and supplies had to move great distances across varied geography at a speed unevenly matched with the infrastructure of the time because there were no interstate highways or container ports like there are today.² Railroads became the “essential mile” in the supply chain for the war effort, the precursor to today’s “Last-Mile.” Fast forward three quarters of a century, and logistics and supply chain are more global in nature with greater demands on capacity and speed with inadequate infrastructure to reach the all-important Last-Mile. Redundancy and the ability to process disruption are two key elements required to support the fast-moving, high-volume requirements of modern-day logistics in the ‘shop-online-and-deliver-to-me’ era in which we find ourselves.” ²

This reality brings into focus current events such as: i) the President’s plans for a “go-broad” infrastructure bill; ii) the pending mega rail merger between Kansas City Southern and Canadian National that will create the first true Class 1 railroad in North America extending from the deep interior of Canada, down through the center of the United States, and on south to the most vital ports and manufacturing regions in Mexico; iii) the in-process industrial REIT merger between Monmouth MREIC and Sam Zell’s EQC in which he is trading in his office commercial real estate model for a new hybrid-powered industrial real estate model that is going all-in on logistics; and iv) record metrics for industrial real estate, be it new supply, net absorption, CPPI (Commercial Property Price Index), and cap rates.

This new logistics model is displacing the 1980s “Just-In-Time” supply-chain model rooted in tens of thousands of physical retail stores to satisfy a “shop and take home” economy.

And the impact is that the traditional retail big-box store is being replaced with hundreds of millions of square feet of eCommerce warehouses that are following the modern logistics infrastructure. These new eCommerce warehouse big-boxes are being developed in what this economist has coined as the “Golden Triangle.” The impact from this new logistics model means thousands more closed retail stores and thousands of new logistics and eCommerce fulfillment warehouses. Another impact is that the nation’s logistics infrastructure has never been more vital in a post-WWII era. The 2021 American Society of Civil Engineers quadrennial report on our nation’s infrastructure and their Infrastructure Report Card (IRC) highlights this point.³ Only Ports and Rail received an acceptable “B” grade, while 11 of the remaining 15 categories continued to receive a failing “D” grade.

In the aforementioned CCIM Institute Insights paper, it is explained that:

“Not all last-mile logistics pathways or models are created equal. Industrial and e-commerce investment is clustering around a region I have long defined as the ‘Golden Triangle.’ The term describes a geographic region that extends from the pinnacle at the Great Lakes southwest to Texas and the Gulf Coast to form one side or leg of the triangle, and then southeast through Tennessee, Alabama, Georgia, the Carolinas, and Florida to form the other side of the triangle. This region is golden in large part because it: i) encompasses five of the seven Class I railroads; ii) has more ports than any other region of the U.S.; and iii) contains 70% of the American population. In other words, the Golden Triangle is the epicenter of logistics infrastructure and where the dominant e-commerce, package delivery, and retail companies are locating their ‘shop-online-and-deliver-to-me’ logistics operations and warehouses.” ⁴

Conclusion

The Counselors of Real Estate has identified logistics as a 2021-22 Top Ten Issue Affecting Real Estate because it is at the epicenter of what makes our economy function. Logistics is the relay race that materials and goods compete in every day moving across intermodal transportation to end consumers; and commercial real estate is the field on which it all plays out.  Logistics post-COVID-19 will disrupt commercial real estate models for years to come. Most commercial property types will be impacted, be it manufacturing, retail, or eCommerce and warehousing.

Out is the 1980’s “Just-In-Time” logistics supply-chain model. The where and why behind site selection for factories, supply-chain, and eCommerce logistics will be explained by the location of modern logistics infrastructure in which the relay race of materials and goods can operate at faster speed and with more capacity and redundancy without dropping the baton/package.  As Walmart defined this new logistics model in 2018, it’s all about OTIF – “On Time and In Full.”

Disruption in commercial real estate capital allocation (more to industrial property category and less to retail) can be expected.  There will be less dependency on physical stores and more on modern eCommerce warehouses that will be increasingly automated with less reliance on labor. And expect disruption in pricing as cap rates are going lower for industrial. As the Monmouth MREIC and EQC REIT merger highlights, the 4%-5% Cap Rates once reserved for the Los Angeles/Long Beach and Inland Empire markets now apply to the “Golden Triangle” and secondary MSAs in proximity to the modernized logistics infrastructure. •

Source: “Last Mile Logistics: On Time and In Full”

It’s been a roller-coaster ride for lumber prices over the last year – and it’s drawn outsize attention from the aisles of Home Depot to the Federal Reserve.

Lumber prices surged to record highs this year on the back of booming demand from homebuilders and do-it-yourselfers with plenty of time on their hands. The price surge was so big and sudden, it became a symbol of what some economists feared: rampant inflation.

But over the past two months, lumber prices have been dropping equally fast, giving weight to the central bank’s argument that pandemic price spikes for many products are likely to be temporary.

That’s not the end of the story, however. Lumber prices may have fallen, but they are still elevated, creating new headaches for the critical housing sector. And companies in the lumber industry are wrestling with a new pandemic problem: a shortage of workers.

Here are three things that the rise, fall and now volatility of lumber prices tell us about the pandemic economy.

Behind the great rise of lumber prices

The supply shock that sent lumber prices to record levels this year did not come from a shortage of trees: The price of raw timber has barely budged.

Instead, the lumber crunch was centered on sawmills, which cut round timber into square boards.

“You can think of us as the grain mill in the ecosystem of the timber industry,” says Ross Stock, a third-generation sawmill operator who runs Western Cascade Industries in Toledo, Ore.

In the early months of the pandemic, many sawmills shut down, both for health reasons and because they assumed demand for lumber would plummet.

Instead, demand took off. Stuck at home, Americans in large numbers began adding decks, repairing fences and even building treehouses.

Professional homebuilders also got busy, as rock-bottom interest rates and a desire for more space pushed demand for housing into high gear.

According to the National Association of Home Builders, single-family home construction jumped 12% last year, and remodeling activity climbed 7%. Meanwhile, domestic sawmill output rose just 3.3%.

As a result, lumber prices soared — from $349 per thousand board feet in April 2020 to $1,514 this May, according to the trade journal Fastmarkets Random Lengths.

“It was absolutely an astonishing run,” Stock says.

That run in lumber prices sparked concerns about inflation as prices across a range of goods similarly jumped.

And then there was the great fall …

Since lumber prices peaked in May, however, demand has cooled sharply.

With vaccines rolling out and the impact from the pandemic easing, do-it-yourselfers have found other ways to spend their weekends.

“People are stuck at home less. They can go out and travel more. They can go out to restaurants and bars,” says Dustin Jalbert, a Fastmarket economist who follows the lumber industry. “In the home centers like Home Depot, Lowe’s, the wood volumes going through there have slowed substantially, especially for items like decking and fencing.”

Professional homebuilders are also tapping the brakes, in part because it’s taking longer to get appliances and doors and other building materials.

Florida homebuilder Chuck Fowke ordered windows for a house he was building in November. They finally arrived six months later.

“You have builders who have building permits that aren’t starting the houses,” says Fowke, who’s also the chairman of the National Association of Home Builders. “You have some that poured their slabs, and they haven’t gone any further.”

In the last two months, the composite price index compiled by Random Lengths has tumbled by 50% to $770 per thousand board feet.

Federal Reserve Chair Jerome Powell sees that drop as a good sign.

“Prices like that that have moved up really quickly because of shortages and the bottlenecks and the like, they should stop going up, and at some point in some cases, should actually go down,” Powell told reporters in June. “And we did see that in the case of lumber.”

But for lumber, that’s still not the end of the story

Despite the recent drop in prices, lumber still costs about 80% more now than it did before the pandemic — a premium that builders say is adding tens of thousands of dollars to the price of a new home.

And the supply of lumber is still not growing very fast.

Sawmill operator Stock says building a new mill would cost tens of millions of dollars. He’s trying to boost output at his current mill, but like other in-demand industries such as restaurants and hotels, he’s now struggling to find workers.

“It takes time to improve a mill. It takes time to develop people,” Stock says. “I’ve worked in sawmills since I was 8 years old. It’s hard work.”

Forecasters say lumber prices may have more room to fall. But price volatility creates its own headaches.

“The challenge right now for a builder is, if you’re asked to give someone a price for a home, it’s very difficult,” says Fowke, the Florida homebuilder. “We’re used to having prices change every six months or every 12 months. We’re getting price changes every two weeks.”

And even if two-by-fours are no longer propping up inflation, that doesn’t mean prices will return to their pre-pandemic wood floor. So lumber may continue to capture headlines as yet another example of a product upended by the unprecedented pandemic.

“It’s kind of like the price of gasoline,” says Jalbert, the economist. “Lumber has been the sort of poster child for these supply shocks that we’ve seen.”

Source: “What The Rise And Fall Of Lumber Prices Tell Us About The Pandemic Economy“