Southern Advantage

Demand vs Supply

Supply and Demand are like two heavyweight boxers that continue to trade punches round after round. For a few rounds, you think Supply has the upper hand and will easily win the match, then Demand comes roaring back and makes Supply look weak and headed for certain defeat. So, which one is stronger, Supply or Demand? That is the question. The answer, however, is constantly changing. In this article in Q2 of 2020, we lamented the weakness of demand but predicted it would surge strong after the pandemic. We continued to build through the pandemic in anticipation of that comeback by our hero Demand. We have not been disappointed! The natural demand that was not fulfilled during the pandemic did not go away; it was simply delayed. At the same time supply was knocked to the mat several times and has been slow to get back to full strength, more unmet demand continued to pile on the left-over demand from the pandemic.

Two years later, Demand is still outstripping Supply. The insatiable Demand is driving the demand side to bid up prices at a rate not seen in decades. Having available product is the only game in town in the industrial real estate market. The uncertainties in the cost of construction and supply-chain delays make build-to-suits a very risky proposition.

We have one build-to-suit project currently under construction, but the only way we could make it happen was to divert buildings we already had on order to the desired location. This saved 6 months in the project timeline. We would not have been able to meet their schedule any other way in this market.

Demand is continuing strong in industrial even as retail and residential are softening. The softening in other sectors should allow supply to gain some ground on the continued strong industrial demand. The industries that we serve are in fact adding to the available supply as well.

Full employment, meager supply and unmet demand are all working to drive up prices. This cycle will run its course as the supply chains continue to recover and expand. Supply is not likely to get back to matching Demand for 6 to 8 more quarters. For the foreseeable future, it will be important to take what is available and pay the asking price. It won’t stay available long!

An End to the Insanity

Amazon has been growing its fulfilment center footprint across the nation at a staggering rate. In 2021, the already enormous footprint expanded by 30%. Amazon’s ambitious building program has been sucking up all of the available supply for warehouse-related construction items like dock doors, dock levelers and if you happen to be in a local market where they are building a new fulfilment center, they are likely sucking up the full capacity of the local concrete suppliers.

We are completing a 650,000SF high-density distribution/fulfilment center building similar to what Amazon is building across the country. Amazon was building in the same market, so we lined up a concrete supplier to put a concrete batch plant on the site of the project. It was a great money and time saver. There was one exception; Amazon needed more concrete-truck drivers for their project so they came to our site during a concrete pour and offered every driver enough money to park his truck and go drive for the Amazon project!

But now Amazon has scaled back their growth plans to only grow their footprint by 20% this year. Many projects in the development pipeline have been shelved for up to a year – an eternity in Amazon time. It is not a sign of slowing demand from consumers, but it was a recognition that the outrageous appetite for new fulfilment center space by Amazon was so high they were competing with themselves for limited construction material resources. They could not finish projects already started, and so they recognized starting more on top of the ones that could not be completed was simply making the problem worse.

Amazon has dialed down their demand to levels they hope the construction materials and construction components supply chains can keep pace with. But even as Amazon has recognized the insanity of trying to build faster than supplies can be delivered, other companies fighting to compete with the dominance of Amazon in the e-fulfillment realm are pressing ahead with their own comparable projects. It will be survival of the fittest as the retail giants duke it out over new methods to satisfy their customers. Time will tell if sanity will return to the warehouse/distribution construction market.

Order Ahead…Way Ahead!

We have been in the industrial building business a long time. We have seen some ups and downs in commodity prices as supply and demand get out of whack for a period until supply increases or demand decreases to balance things out and prices get back to normal. These are not normal times.

The pandemic resulted in an intentional shut down of “non-essential” businesses. It was a recession on purpose. It turned out to be a lot more difficult to turn the switch back on than to turn it off! As the economy tries to resurrect itself, the pent-up demand is real and the lack of labor to meet that demand is also real. With the additional infusion of trillions of Federal “relief” dollars, inflation has re-emerged after four decades of hibernation.

Things will eventually return to a balance; but, in the meantime, what is one to do? The supply chain disruptions are erratic and hard to predict. Here is just one story of what we have done to combat this unpredictability.

We build speculative industrial buildings, and virtually every one of them need loading dock levelers for the tenants to conduct their business. In the past, we would wait for the customer to tell us what they preferred. We would order the product, and it would show up in 8-10 weeks. This fit in with the time to build out their offices and was just a part of the work to get the tenants in the building. When we started getting quotes at 26 weeks to deliver levelers, we said this is going to be a problem. A big problem!

We could negotiate a lease with a client and have the building ready in three months, but it would be another 3½ months before they could have working levelers. They would understandably not want to pay rent without the ability to load and unload trucks.

So, we decided to change our policy and go ahead and install levelers so the buildings would be usable from day one. We bought levelers for all the buildings we had under construction…and the next four buildings we had in the planning stages.

We are glad we did. Delivery times are now up to 35 weeks, and prices have more than doubled. There are other critical items that need to be ordered in advance these days. Electrical gear and transformers can be 50-60 weeks delivery time for high load equipment. You can get overhead doors, but the springs to raise them are likely to come 12 weeks later. In today’s environment, “order” everything you can identify that you are likely to need in the next year right now. You will be glad you did!

Field of Dreams for Industrial

“If you build it, they will come” is the famous line from the movie Field of Dreams. That is a risky slogan to live by. But, it is in fact the business model for The Hollingsworth Companies Industrial Building Program. In the last few decades, it has gotten increasingly more difficult to get buildings built. Not that steel or concrete have changed in any significant way over that time, but the regulatory environment we live in has changed the time to get a permit change from a couple of weeks into several months. In the last few years, supply chain issues have made it even more difficult and uncertain to locate materials and get them delivered to the project in a timely manner. Construction is not for the faint of heart these days. That is why, more than ever before, companies are choosing existing buildings to meet their growth needs. Not many companies can afford to wait over a year or two to start up a new business unit or expand their operation.

That is where The Hollingsworth Companies comes in. We are building speculative buildings currently in Alabama, North Carolina, Tennessee and Virginia. As we near completion on these buildings, multiple users are lining up to lease the facilities. In spite of the fact that lease rates have risen an average of 14% in the last two years, high demand, low inventory, even higher replacement costs combine to create an urgency in the market that continue to drive development and market absorption.

However, this is not a business that is easy or quick to enter. We acquired hundreds of acres of industrial land, implemented the proper zoning and protective covenants, extended infrastructure suitable for industrial users, and built one speculative building after another. We are getting ready to celebrate our 25-year anniversary of our partnerships with Prince George County Virginia and Mocksville, North Carolina. In those two communities, we have developed 28 projects totaling over 4,000,000 square feet. We are now seeking the locations for our next generation of privately owned industrial parks, because we are building on the last available lots in our first-generation parks.

There are many unprecedented and unexpected turns and twists in the current economic and political climates, but we still press through to bring valuable assets to growing businesses across the Southeastern United States, a field of dreams for industrial.

Some Things Are The Same, and Some Are Different!

The Hollingsworth Companies has privately owned industrial parks for the last two decades, and we plan for the future with pre-permitted and pre-graded foundation-ready lots to be able to deliver buildings quickly and reduce the risks associated with a construction project. In 2016, we planned a pair of buildings in Andersonville Tennessee, each 126,000 SF. Both lots were pre-graded at that time, and one building is the mirror image of the other. We built the first building to house the corporate offices of our metal building supplier A&S Building Systems.

Four years later as we prepare to build the mirror image of the original building, A&S Building Systems has been rolled into a sister brand and become CECO Building Systems. The building is exactly the same; and, because it had already been engineered, we were able to put it straight in line for production. When we ordered the original building, it showed up on site ready for erection in 6 weeks. But, in today’s disrupted supply chain, the new building delivered not in 6 weeks but 6 months. In addition to the extended delivery time, the cost of the building package increased 199%.

We had to consider how this will affect our speculative industrial building program. We ordered this building and another in Q1 of 2021. We ordered four more in Q3, and these trends have only gotten worse. So, what does this mean for industrial building? We are also experiencing the highest demand for buildings on record, and each month it continues to increase. The options for industrial tenants are: existing spec buildings or build-to-suit projects. Today’s extended delivery schedules of up to two years to deliver a building makes the option of a build-to-suit simply impractical. Not only is the time stretching out, but the price volatility in that span is another risk that is unacceptable.

Our conclusion, in this market with constrained supply with record demand and rising inflation, is that we are better positioned to buy now and build as quickly as we can receive the materials. Even though the prices look high compared to the past, by the time we are finished with construction, it will be viewed as a bargain. Rents will have to rise; but, having a building ready for occupancy is the only option left for industrial tenants that need space. We have six buildings underway as we go to press. We don’t know what the future will bring, but we know some things will be the same, and some things different!

Growing Together

Gadsden, AL – The Hollingsworth Companies first met the leadership team of Fehrer Automotive in May of 2009.  Fehrer was at that time the key global seat foam supplier to Mercedes and were pursuing Volkswagen Group in Chattanooga. Fehrer was successful in landing the VW business; and, by December, we negotiated a 10-year lease with Fehrer for half of a 238,000 SF building we own in Gadsden, AL. In order to help them establish their new North American location, we offered them a flat rent for 2 years with a significant rebate as rent was paid.  The collaboration paid off for both companies.  In September of 2012, Fehrer committed to take the balance of the building for a 10-year term with a phased-in rent for the added space over the first two years as they installed and certified an additional production line.  This enabled Fehrer to continue to grow their volume and take on a new customer Tesla.  We also approved in February of 2015 a sub-lease to a key supplier of Fehrer to co-locate in their space. Fehrer’s business continued to grow, and we helped them finance needed upfits in June of 2018 with an early renewal and extension of the lease term to 15 years. This too was successful and allowed Fehrer to land additional business. We reached agreement on an expansion of the 238,000 SF building to 491,000 SF and a re-start of the 15-year lease term. This also encouraged Fehrer to relocate some production from Germany to Gadsden, AL.

Fehrer is now one of the largest employers in Etowah County, and they will be adding more jobs with the expansion. The Hollingsworth Companies’ collaborative approach to tailoring the lease to fit the economics of Fehrer’s business cycle was even more important than our ability to make modifications to the building to support their manufacturing systems. By understanding their business model, we were able to reduce their cashflow at a time when they needed to invest in equipment that would result in increased revenues. On June 9th, we had a ribbon cutting for the expansion. Fehrer is well positioned to move into the post-pandemic economy. We are twelve years in on a relationship that will last at least 25 years. So far, we have helped Fehrer grow by 400%.

What can we help your company do?

Close the Transportation Loop for Speed and Efficiency

The Hollingsworth Companies is building ever larger industrial buildings. Huntsville, Alabama has a 403,000 SF building under construction and in SouthPoint Virginia located in Prince George County. We are building our first 650,250 SF 40’ clear tilt-up concrete industrial facility. That is roughly 15 acres of floor space under roof. That equals a lot of concrete. For each acre of concrete floor, it takes about 80 very full truckloads of concrete. That is why it is important to try to find a concrete plant that is close to a construction site the difference between 5 and 10 miles makes a significant difference in price as well as reliability and consistency of deliveries to the job site.

Our schedule called for placing an acre of floor slab in a day…every day for 15 days straight. Each day the pour would start at 2:00AM and the crews were paced to place between 80 -100 cubic yards of concrete an hour for 10 hours straight. That is ten trucks an hour for ten hours straight, or an average of one every six minutes! It quickly becomes obvious that normal traffic even on a short trip of 5-10 miles is not likely to deliver that kind of consistency for 10 hours straight even for a single day, much less 15 days in a row. Even if you could make the trip in 15 minutes, you would need to have two on route to the job and two more returning to the batch plant for each truck unloading. With four trucks unloading simultaneously, that gets to 20 trucks running the circuit for 10 hours.

Driving a concrete mixer truck is not at all like driving other trucks. They are very large, very heavy, and the driver must also know how to care for the concrete onboard and how to properly unload it for the placement crew. It is a highly skilled position that is hard to find. This can be a bigger limiting factor than the ability of the concrete plant to produce concrete.

So, how do you make this problem go away? The answer is an on-site concrete batch plant. With the concrete batch plant 1200 feet away instead 5 miles, the six-minute average unload time can be achieved with a total of 8 trucks making the 2400-foot round trip! The entire slab is now in place and ready for the 400 truckloads of concrete to be placed in the wall panels.

Preparation Makes It Possible

Time is a precious commodity. We all get the same dose every day, but once it is gone it is gone. We often get requests for the impossible. “Can you build a 400,000 square foot building for us in three weeks?” The answer to that request is, “No.” The important follow-up is what we are able to provide.

We recently had such a request from Polaris Manufacturing in Huntsville, Alabama. We are just a couple of miles from their assembly plant, so they were already familiar with the Hollingsworth Companies. They knew we had started construction on a 404,738 SF warehouse, but they needed to be in the space by the end of the year; and, our building wasn’t scheduled to be finished until Q3 2021. The location was perfect, but the timing just didn’t work. So, they looked for other options in town. They found an option that could work, but there were “issues” that made the possibility problematic.

The Hollingsworth Companies started the SouthPoint Business Park in Huntsville, AL in 1999. We acquired the land, rezoned the property, installed industrial grade utilities to the site, and began building speculative industrial buildings starting with a 108,960 SF building. The number of facilities we have built in SouthPoint is now ten, totaling 1,557,868 SF. That is twenty years of preparation for success. With the increased demand for suppliers to locate close to Mazda-Toyota and Polaris, the Hollingsworth Companies took the unprecedented decision to keep two speculative industrial buildings available for immediate occupancy. We had just completed two facilities at 109,080 SF and another at 173,888 SF to meet our goal. Before we had even completed construction on these facilities, we went even further to start construction on the 404,738 SF facility. We took these steps to be prepared for opportunities that might arise. Then, when the other option for Polaris hit a dead-end, they asked the impossible; and, we had alternatives.

We couldn’t complete the 404,738 SF building in three weeks, but we could get them into our other two completed buildings totaling 282,968 SF in two weeks; and, when the 404,738 SF building is completed, they can move to it and cancel the leases of the other two facilities! And, to help them with the costs of moving twice, we offered the two short-term facilities at steep discounts. This was in the realm of the possible! Polaris and their entire corporate team worked through the Christmas holidays to complete the leases and start moving product! It pays to be prepared.

Business Continuity

We have been in the industrial building business a long time. Unlike most of the other developers in the industrial sector, we build only for ourselves and hold the buildings long term. We build them like we are going to own them, because we do! Over 35 years of building and owning buildings, you learn you what lasts and what is a constant maintenance headache.

One area we have always focused on is the roof. A good industrial building has to have a good floor and a good roof, or it isn’t worth much. We have been long-time advocates for standing seam Galvalume roofing. It is very economical initially and saves weight and money. The material is guaranteed for 25 years and often lasts more than 30 years giving good service.

When you hold on to buildings for the long term as a core part of your business, you eventually run past the 30-year life of a Galvalume standing seam roof. You can remove it and replace it as if you were installing a new roof. However, this is labor intensive to double handle the roofing sheets. It would be good for another 30 years and make it literally like new, but what do you do when you have an operating business in the building with millions of dollars of equipment that needs to continue to run day and night?

It depends a bit on the capacity of your structure to carry additional weight, but you can actually leave the original roof in place and add another roof over it. This results in a brand-new roof and the best part is that the operating company in the building below never knows it is happening, and they can operate in their normal mode without disruption.

We have approached the roof-over-roof a couple of ways. If we have the additional structural capacity to accept 3 more PSF of roof loading, the best long-term solution is to go metal over metal and put a new layer of standing seam Galvalume roofing over the original roof. This gets you another 30 years of roof life for the building.

If you are limited in the amount of additional weight the structure can carry (because the tenant is hanging many pipes and other items from the roof for instance), a second method is to fill the standing seam flutes with rigid insulation and cover with a TPO roof membrane. This solution is fast and inexpensive but has a more limited service life of 20 years.

The most important consideration is keeping the tenant operational. We work hard to understand our customer’s business and do what we can to keep them going, because they keep us going!

It’s Time to Go BIG

For those of you that know our history, The Hollingsworth Companies first industrial facility constructed in Clinton, TN was 65,000 SF. In the early years, our industrial portfolio consisted of buildings from 45,000 to 75,000 SF primarily in the East Tennessee market.

As the company grew and the industrial market in the Southeast changed, our focus as a company also changed. Business parks were established in Prince George, VA, Mocksville, NC, and Huntsville, AL. With the addition of these three SouthPoint Business Parks, building sizes also increased ranging from 75,000 to 250,000 SF. While building sizes were increased to support larger customer requirements, our focus remained in tertiary markets with single tenant facilities.

As we established our reputation for reliably constructed lease facilities, we started accepting build-to-suit projects that fit our portfolio. Our main requirements were single tenant projects, tertiary markets, high clear heights, close proximity to major freeways, and steel/masonry construction. These projects typically range in size from 150,000 to 300,000 SF.

While our primary customer is looking for a single tenant facility from 100,000 to 200,000 SF, we have increasing requests by our prospects for larger facilities as well. To meet this demand, we have begun construction on a three-building project for facilities that range from 400,000 to 660,000 SF. We quietly broke ground for a 400,000 SF tilt wall facility on our Huntsville, Alabama advantage site in June. Within 60 days, we will follow this with a 660,000 SF facility in Prince George, VA. The third building will be a 400,000 SF facility, final location to be determined in Tennessee. These larger facilities will be tilt wall construction, 50+ dock doors, 40’ clear height, 60’ x 60’ bay spacing, LED lighting, and ESFR fire suppression system.

We look forward to the next step in our evolution as a company. While we will have larger building projects going forward as well as our normal sizes, we will also continue to focus on build-to-suit projects that support economic development agencies in the secondary markets of the Southeastern United States. We are very bullish on the Southeast and believe the work horse of the American economy will continue to be small to midsize companies located in the Southeast.

For information on our standard 90,000 to 250,000 SF new available facilities, a build-to-suit, or a 400,000 to 600,000 SF facility, please contact Tom Mann at (865) 719-6884.

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