“Construction delays are wreaking havoc with corporate real estate strategies.” So, Ted Liles, SIOR, the Phoenix-based principal of Industrial Services for Cresa Global Inc., expresses the frustration shared by industrial brokers and their tenants around the nation—if not the globe. Be it concrete, steel, HVAC equipment, or racking systems, the delays in material delivery are mounting up—along with pricing. Meanwhile, all project stakeholders tap their feet in nervous anticipation.
Well-documented hang-ups in the global supply chain are the prime culprit, but there are ancillary delay drivers as well—including, well, a dearth of drivers. “You might be expecting 20 concrete trucks to pour your warehouse floor,” reports Pat Feeney, SIOR, a fellow Phoenician and executive vice president of CBRE, “but the concrete company sends only eight, explaining that that’s all they can deliver because of the lack of drivers.”
But labor only continues the list of delay issues. Until Amazon began cutting back assets earlier this year, it would enter a market and dominate lumber and steel orders, leaving slim pickings for other takers. (For the record, in mid-September alone, the e-tailing giant shed plans for 25 new sites and shuttered 44 other facilities.) And while those cutbacks provide a bit of a relief valve, they aren’t enough to alleviate the shortages, much less normalize local markets.
“Every time there’s a change of any consequence, you’re generally looking at a cost increase of some sort.”
And wait, there’s more. The unprecedented industrial land rush caused by the pandemic still sets competitors against each other for the spaces that are available, while in many markets, outside competition is coming from food groups such as the multifamily sector. Feeney, for example, puts the current local-market influx of people at close to 125,000 annually, and they all need a place to live.
Put it all together and “there’s a logjam,” says Liles. “For every deal we’re working on, we have to go back to the current landlord and negotiate some sort of holdover or extension because the new premises won’t deliver on time.” And if the target space is second-generation, there’s likely a delay involved in the existing tenant’s new home, creating a sort of big-box domino effect. “So, every deal requires an additional negotiation.”
Holdovers built into the lease might run from 150% to 200% of the base rent, he explains, “as long as it doesn’t interfere with potential revenue with the landlord,” which, of course, is a virtual sure thing these days. In fact, one Cresa client took the holdover, “assuming it would be well below market until we got into the new space.” But it was space the landlord had already backfilled, and they gave the tenant the lady-or-tiger option to pay the new rent or move out in two weeks. “They paid because there was no place yet to go.” The increase was 600%.
YOU WANT IT WHEN?
Of course, everyone, be they online shoppers or anxious industrial tenants, “wants delivery immediately,” says Dan Jensen, SIOR, principal of Kessinger Hunter in Kansas City, Mo. But, on a 700,000-square-foot box, “where it used to take about a year from moving dirt to handing over the keys, it’ll now take anywhere from 14 to 16 months.”
Not only is it taking longer, but it’s also more expensive, well beyond landlord issues, and how expensive is often a question. “Every time there’s a change of any consequence, you’re generally looking at a cost increase of some sort,” says Jensen, who is currently working on a 500,000-foot build-to-suit.
“Steel was so far out about a year ago that we had to give them a million-dollar non-refundable deposit to hold the number and keep our order in the queue,” he explains. But with increased delays come price shifts—especially given the tariff situation for offshore steel.
“They want a good chunk of their non-refundable money much sooner, and their product deliverable is much later,” he continues. “It used to be that you’d get your steel order and you’d have several months in the process to sort out such details as roofing loads. The way things are now, if you don’t have all that worked out immediately, and you have to make changes, you can lose your pricing.”
In a classic case of understatement, he adds: “It’s frustrating.”
DELAYS EASE—MAYBE
Happily, construction delays seem slowly to be resolving themselves—depending, that is, on whom you ask. “It’s gotten better,” says Jensen. “While availability has improved a bit, in the steel market especially, prices haven’t come down significantly.”
An easing supply chain can be attributable to proactive measures—such as reshoring—on the part of manufacturers, as well as to a slowing of demand (hence the Amazon cutbacks), all of which relieves pressure at our ports. (Marketplace.org compares the earlier clogging of the Los Angeles and Long Beach ports to the lines at the Department of Motor Vehicles.) Inflation and the current recessionary threat turn out to be double-edged swords as well, troubling for sure, but combining to ease purchasing and therefore, container traffic.
Further, according to the Financial Times, “The average cost of taking the standard 40-foot metal box across the world’s oceans is down by about 45 percent from its peak in autumn of last year [2021].”
But local dynamics belie national trends. “The delays aren’t moderating,” says Feeney, who points again to the growth Phoenix and surrounding areas are enjoying, “They’re on fire. Industrial absorption averaged 9.5 million square feet between 2014 and ’19.” By comparison, the market finished 2022 at nearly 25 million feet. That healthy absorption is the result of fierce competition, and according to Colliers data, none of the 25 major U.S. markets the firm tracks has vacancies above 7%—and Phoenix is less than 3%. (Kansas City—Jensen’s market—is just over 4%.)
“Situations will remain a little more challenging for the foreseeable future for tenants before it gets better.”
And if Amazon has cooled its jets somewhat, the local availability of materials is still challenged by two local—huge—Phoenix developments: chip manufacturing plants coming out of the ground now for Intel and Taiwan chipmaker TSMC. These projects carry price tags of $20 billion and $40 billion, respectively. And while more homegrown chips bode well for the supply chain in future years, “it’s put a huge strain on concrete,” says Feeney, “as well as causing major snafus on the labor side.”
ADVICE—SUCH AS IT IS
Given the ramped-up industrial space race, tenants—and therefore their brokers—are caught between the rock of equipment delays and the hard place of remaining competitive. “They don’t have the luxury of postponing deals,” says Feeney. “If a tenant comes to the market in September, they’ll have their air conditioning units by April or May. But if they come in February, they may have to wait until the fall.” That isn’t an option when temperatures can reach 110 degrees. And it certainly doesn’t help hiring and retention, “not when Amazon can offer better pay as well as AC.”
“We’re in the business of delivering bad news right now,” says Liles, who leans on healthy communication to “keep everyone on the same page.”
“We spend a good amount of time educating our clients in all their markets,” he continues, “in terms of local conditions, availability, the different stages of deals and the status of landlord negotiations.” It helps, of course, that every industry has its own supply chain angst, so many of his clients already feel the pain and understand the lay of the land.
Communication is also important because he sees a lot of market misinformation, provided largely from data websites.
“There is so much outdated information there,” he reports, “and if you were to click on a desired market, you’d see all of these spaces that delivered in Q2, when the reality is that they may not deliver until spring 2023. It’s creating a lot of pushback, and a lot more competition for the spaces that are ready to go.”
At the end of the day, “You bite the bullet,” says Jensen, who adds that he tries to create some leverage with suppliers. Is steel a problem? There are plenty of wood-truss suppliers on the West Coast. The trouble is that, “lumber is getting as crazy as steel.”
Liles adds that he knows of “a lot of developers” who haven’t gotten to pouring concrete yet, and they “either pulled the plug on their project or they’ve applied the brakes.” Which translates to even less product coming to market as demand remains high.
Ultimately, “Situations will remain a little more challenging for the foreseeable future for tenants before it gets better,” he concludes. “Is it getting better? Yes. But our customers still want their space yesterday.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
Pat Feeney, SIOR
Dan Jensen, SIOR
Ted Liles, SIOR