2nd Quarter 2024
Market Watch
by Joe A. Hollingsworth, Jr.
All of us remember the “haydays” from three to six years ago when there was no way to stop the forward momentum of developing and selling industrial real estate. There was plenty of solid demand for the right fundamental reasons, and developers were able to build to the capacity needs without sinking any more than 20% to 25% equity in the deal. That type of scenario using the proper amount of leverage made industrial developers seek deals. They made sense from start to finish.
Then, it began. The assertiveness of EPA, the Corp of Engineers, and state-administered federal rules made water quality restrictions and resulting costs virtually prohibitive. In some cases, it was almost a “government taking” of valuable land declared as unusable by some agencies, then coupled with the ridiculous government caused inflation which increased construction costs so rapidly that we could barely keep track. This made it almost impossible to project to-be-completed numbers for the prospective tenant and all build-to-suits; and, in some cases, speculative buildings were hard to project. Then, the subcontractors were hit with not only price increases but huge delivery problems due to the deteriorating work ethic and restrictions on supplies. This was reflective of the supply chain problems. Then, the interest rate rise hit as well as the restrictive monetary policy about real estate lending by banks, unless they were self-funded and were gutsy. However, in the end, industrial developers mostly overcame these obstacles.
But, the demand side….where in the heck has the demand gone? There are a few subsidized and government-induced industries still forced to expand. However, in the last three months, the demand has fallen radically from several years back. It seems as though the mergers and acquisitions that the government has allowed to go forward have usurped the normal expansion of mid-size businesses. There is substantially less demand for space from the previously active mid-size companies that industrial real estate relies on for growth. I am not saying that it has all gone away, but I think boards of directors that have not been acquired by larger companies are simply pulling back the reigns until they get some clarity on this country’s direction.
Those of us that greatly enjoy the industrial developing business (and have lived through several cycles) understand that based on the above two paragraphs, this moment in time is a train wreck. There are many paths to take; but, for our company, we are going to produce at a modest rate based on scarcity and timing the completion of these facilities by the end of the year. This is counting on substantial demand returning after this election. We will keep our fingers crossed!
