Top Trends to Watch in Industrial Real Estate | Top of Mind Series

Welcome back to the Invest Like a Billionaire podcast. I am your host, Ben Frazier. Today I got co-host Bob Fraser. Super excited to have him on this episode today. We are excited to share some recent charts that we just came across from Newmark Zimmer. We're going to share in a minute on the industrial landscape in the US. So if you've been following the podcast for any length of time, you know We're very bullish on industrial. This is an asset class we've been very focused on for the past several years, and we're kind of going all in in a bigger way at the end of this year and into next year because of what we're seeing. And we're going to have some charts we're going to show you here. So I encourage you, if you can watch this on a video supported platform like YouTube, to look at these charts because it's going to be pretty, pretty impressive what you're seeing, kind of the the landscape shifting in a lot of these themes we've been talking about for a while are coming to bear. So, Bob, you ready to kind of dive in? Let's go.

Yeah. I mean, we've been talking about this reshoring trend for a long time, but, you know, we love to look at big, big, big trends, the things that are not changing. And it's very difficult to predict like what the stock market is going to do tomorrow or what interest rates will do. But some things are very predictable because there are these glacial trends. And one of those is the reshoring trend where we're seeing, seeing companies moving back to America and to North America. So nearshoring as well, where they're moving, you know, to Canada or primarily Mexico. And so we're just seeing huge amounts of spending. So this left chart is construction on manufacturing facilities. You can see it's pretty much it's a hockey stick. Up through 2023 where companies are, are, are spending money. And, um, and on the chart on the right, you can see job announcements per year, um, through 2023. And literally, job announcements, you know, 400,000 new jobs, uh, being announced is moving to America. So these are manufacturing, logistics kind of jobs.

And this is a 66% increase from just 2 years ago. So it's, it's really starting to hit pretty, pretty quickly here. And then you can see here the chart on the left. This is construction spending for factories on a rolling 12-month basis. And you got to see this chart. This is just crazy. It's, it's a hockey stick in the past 3 years. It's, it's nearly tripled. And so this is spending. It's not just on the real estate. But it's on everything associated with manufacturing as well, right? You got the equipment, you got infrastructure, you've got all the technology. A lot of these are like chips plants or automotive manufacturing. And then Bob, talk about the chart on the left here. This is from Newmark Zimmer, one of the new charts that we've just come across here.

You mean the one on the right? Yeah. All right. Right. Yep. Yeah. And this shows basically the amount of money spent spent in manufacturing, like manufacturing development. And you can see the size of the bubble. So the larger bubbles are $500 million to $1 billion, and they're just all over. The major sectors are automotive sector, biomanufacturing, energy, high-tech. And, and there's just— I mean, you know, there's hundreds of these bubbles. And, and it's interesting too, they're concentrated in the Midwest in the South and then the Rust Belt, and which, which these are, these are places that are just ideal for— they're centrally located, they're inexpensive, and they have access to a very educated and, and available workforce. So they're just ideal places for manufacturing and logistics kind of hubs and, and generally more tax friendly as well.

What we're seeing too is, is like kind of these shifts away from these coastal markets, right, where lease rates are already very expensive, but then you think about the types of tenants that are really wanting to bring, you know, these manufacturing plants back to the US, they need a strong blue-collar workforce, right? They need strong labor force that is not super expensive and in kind of good central located areas. So you think about the Midwest, the Rust Belt, that's so much of what comprises the workforce there and what's really drawing a lot of those tenants to not only cheaper lease rates, but also really strong contingent of workforce. So this is the chart you can see. This is construction starts nationally in industrial. And you can see very similar to multifamily, there's a huge boom in 2021, 2022 of new construction that was started and industrial— in industrial. And we're starting to see, you know, the deliveries were really hitting, you hard at the end of last year into this year. So we've seen kind of a tick up in vacancy as these deliveries have hit the market. But starts is a really, really important data point because it's a leading indicator of what the future supply is going to be, right? So in construction and development, you can look at what's being started right now and project out what will supply be down the road. And so you have a pretty clear picture and you've seen here it's dropped to 10-year lows, the new starts nationally.

So, and of course, the reason The reason is recession fears and interest rates, right? So, so what happened is all the big construction companies, industrial construction, just put their pencils down. They just kind of said, we're going to wait and see. And, and what that's doing, it's going to create a massive gap in deliveries over the next few years. So we're going to see 2 to 3 years of a big hole. And just a big shortage of deliveries. And so here, here you've got this— here's the big picture, right? You've got this massive, massive 20, 30-year megatrend called reshoring. Meanwhile, you've got all the manufacturing of building this, building this real estate that the reshoring companies are going to need has completely hit an air pocket and they've stopped, you know, because of interest rates. And now add the third element of timing is that now interest rates are going to be dropping. And so this is— if there ever was a time to get into, you know, uh, industrial construction, this is it. This is the time to do it. Yeah.

So let's, let's talk about some of these new charts we came across. So Newmark Zimmer, it's a big research firm, big brokerage, um, big focused on industrial and was just talking with one of their brokers the other day and he shared with me these charts from their recent kind of annual summit. And it's just, it's so powerful to see like a really nice chart, number one, but that just consolidates a lot of the things we're saying in the most recent kind of timeframe. So talk about what you were just saying, but what they're kind of forecasting here with supply and demand over kind of the next 12 months.

Yeah, so, so we, we saw in the, you know, the COVID timeframe kind of, kind of demand just really ballooned, really mushroomed demand for industrial real estate. And then we saw supply hitting, you know, kind of a 2-year kind of delay from that supply. Well, demand— so people make these starts and it's now, it now crested and is, and is dropping. And so we've, we've been in the last couple years just a little bit of oversupply relative to demand because of the post-COVID kind of fears and recession fears, etc., and higher interest rates. Meanwhile, now we're seeing a crossover again. So literally we're seeing demand crossing over where it's starting to exceed supply. And this is, this is what's being projected in the next, in the next couple of years.

So basically the current vacancy in the market, which isn't that much, I think national vacancy is like 6.5% and which is which is, which was basically no vacancy because you always have the albatross property, right?

The really weird property, right? One wants, right?

Yeah. So it's really the absorption is expected to kind of take all that existing supply off the market and then all of a sudden they're kind of predicting that by the end of 2025, within, you know, about 12 months from now, really demand to exceed supply. And again, we're not seeing the starts to keep up with that. And so it's likely going to be, you know, a lot less product available. You can see here kind of a similar story, but another visual representation of the big fall-off in new starts. So the pipeline of new construction has dipped below 400 million square feet expected in 2024 for the first time in 4 years. So it's been, again, a huge dip in that construction. And then leasing is starting to mount back up, right? So it's kind of lagged a little bit with recession fears absorbing a lot of this new supply. But again, those trends are really starting to tick back up where leasing is starting to come back as these, these firms need it. So let's talk some, some high points. So I thought this was really interesting. Newmark Zimmerer came up with kind of 4 predictions for the U.S. industrial market. Over the next 12 to 24 months. You want to talk about some of these?

Yeah, the first one is the superpowers will flex supply chain muscles more earnestly, and global shifts in supply chains will continue. So we're seeing this. I don't know if you guys are tracking the news out of China, but they're starting to flex their muscles. And, and, and a bunch of products that, that they are— a bunch of materials, sorry— that they are, that they're the leading manufacturer of, including rare earths, they're starting to restrict exports. Of a lot of these materials that they are the leading supplier of these materials. And so we're seeing them really starting to create some trade wars. Well, what's the effect of that? That's going to be, I mean, in America, you know, we need graphite, we need rare earths, we need the, you know, all these materials, but in order to produce our electronics and our, and our, you know, electric vehicles and all these things. Well, so what's going to happen? The reaction is going to be, oh my God, we need to bring this into the United States. We need to source these from different places, and primarily the United States. And, and in fact, the United States is like rare earths— they're actually not rare. We have huge deposits of rare earths in the United States. We just don't— you know, we have huge deposits of lithium and graphite, but there— but there's these permitting issues. And so we're going to see, I believe, the regulators and politicians start to get, get behind more and more, uh, the production of these things locally. And all that requires, you know, requires, you know, um, investment in the United States. So we're going to see more and more of these supply chain issues, which is only going to accelerate the desire and the need for all kinds of, of, of reshoring, nearshoring, and onshoring starting to happen.

And really what we've been saying for a while is this is a, this is a megatrend, right? This is not something that's just going to happen for a year and then we all move on from it. It's, it's the whole landscape globally is completely being rewritten right now.

Right.

And it's really starting to pick up. We're seeing that from all the investment.

There's not too many megatrends that have, you know, 20-year time horizon where you can really see this thing is not going to stop. For 20 years. I mean, it may have, you know, a little bit of variance year to year, but this is, this is a massive trend that's happening and it's not going to stop anytime soon. And this, this is one of them. So, Ben, hit the second point here about secondary and tertiary markets.

Yeah. So the second prediction is this absorption in secondary and tertiary markets will continue to outpace primary markets. And again, a lot of the reason for that, as we shared before, is cost. And access to, you know, bigger primary markets through distribution. And so a lot of the thing that's driving the shift to the US is, you know, good strong labor force and good value for what you're paying for that.

Exactly. Just for instance, I mean, we were looking at developing some industrial in Salt Lake City and which, which is kind of a primary market. And, and you would think, you know, the costs would be reasonable, but the costs were insane. I mean, it was the manufacturing costs were something like 2 to 3 times The labor force costs are higher. So if you're looking to place a manufacturing facility somewhere, you know, there's this— these secondary and tertiary markets, you know, let's say Wichita, Des Moines, you know, small towns in Georgia, you know, and South Carolina. These things are just— they're superior. And, and so actually predicting absorption is going to increase and outpace the primary markets. Why? Well, they have access to the workforce and they have access to the logistics, right? The highways, ports, trains, etc.

Yeah. The other prediction, third here, is heightened competition for prime land positions will have a constricting effect on spec industrial pipeline. And we've been seeing this in a lot of markets, but a lot of the land has already been tied up, right? It's like, oh, I can just build it anywhere. It's like, no, it's actually difficult to get good land in good locations. And because a lot of these bigger developers and bigger you know, firms that have, have maybe some vacancy out there from their big, big facilities that they built that aren't really what the market needs, their pencils down right now. And so they're not developing the same way they were. And, you know, we're really kind of on the front end of this, the demand to start to outpace supply. And so it's going to need to have a catch-up effect. And it's, I think, going to be a pretty big lag or kind of gap in the market for what we're seeing on the demand side. And that kind of follows the fourth here. You want to talk about that?

Demand consistently begins to outpace supply in 2025 and rent growth, growth rebounds in 2026. So again, there, this is hitting kind of the supply and demand curve where we're seeing a crossover again. So we saw a crossover, a negative crossover a couple of years ago, and now we're seeing a positive crossover. So this is going to be, you know, time to make hay while the sun is shining.

It's— to me, it's— I kind of have the visual visualization of— I think it was Wayne Gretzky said, you know, don't skate to where the puck is, but to where it's going. Right. I think so much of the time as investors, we are backward looking. It's like, oh, well, there's a lot of supply that, that hit, so it must be a down market. It's like, no, no, no. Now is the time to get in front of it. Because if you're developing right now, if you're building right now, by the time this gets delivered to the market, you're going to be the only game in town. You're right. You're going to be the only option that the tenants have. And getting in front of that curve and skating to where that puck is going to be is so, so important. And again, this is why we're so excited. Like right now feels like a really, really important time to be jumping into the market. And, you know, if you're on our email list, you'll probably be hearing about some of the projects we've got going on. But we're really going, you know, full-on doubling down into industrial right now for the next 12 months because of that. So yeah, if you want to get on the email list, be sure to join our investor club. You can see the link at the top on thethebillionairepodcast.com. You can check out our website, AspenFunds.us, and sign up for our latest offerings. We are going to be launching several industrial development projects and you have to be accredited investor to participate in those, but be sure to learn more about these because this is a trend that you don't want to look backwards a couple of years from now and wish, oh man, I, I heard someone talk about that. I heard Bob Fraser talk about that and I wish I would have gotten involved. And so be sure to get more information on that. We thank you so much for listening and hope this is helpful episode and be sure to subscribe. Stay tuned for more educational content like this. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors.