The State of Warehousing: New Data, Trends and Strategies

Details #

Melinda McLaughlin (Global Head of Research, Prologis) joins Karl to discuss the current state of warehousing, how the supply and demand cycle affects logistics real estate and long-term projections for warehousing into 2024. Listen in to learn about the value of tech-enabled networks—and the importance of test-and-learn approaches. Then hear from Jordan Lawrence (Flexe Director of Logistics Strategy) and Ben Dean (Flexe Sr. Director of Network Strategy & Optimization) as they discuss the latest warehousing trends and Flexe data points.

Some of the topics explored:

• The cycle of supply and demand in logistics real estate

• Market expansions and scarcity into 2024

• Nearshoring as a trend and what that means for U.S. warehousing

• The importance of tech-enabled omnichannel networks to meet consumer demand

• How test-and-learn approaches reduce CapEx spend and create a competitive advantage

Logistics Leadership Podcast legal disclaimer

Episode Transcript #

Melinda McLaughlin 0:00

So again, a disconnect, right? You've got the pressure, don't lease a new space, don't invest the capital there, but it's kind of the best time ever.

Karl Siebrecht 0:09

I'm Karl Siebrecht.

Ben Dean 0:10

I'm Ben Dean.

Jordan Lawrence 0:11

And I'm Jordan Lawrence. And this is the Logistics Leadership Podcast.

Karl Siebrecht 0:25

Welcome back everybody to the Logistics Leadership Podcast. Once again, I am joined here with my colleagues, Jordan Lawrence and Ben Dean. Guys, it's great to be back with you here on the pod.

Jordan Lawrence 0:36

Great to be with you, Karl. Ben, good to see you again.

Ben Dean 0:39

Likewise Jordan, let's do this.

Karl Siebrecht 0:41

So the topic for the day is the state of the warehousing market, a very, very meaty topic and one that is obviously near and dear to our hearts. Jordan, what's your perspective? How do we kick this one off?

Jordan Lawrence 0:55

Karl, that's right. We've got a lot of passion around this topic. I think there's a great theme that we can unpack as we go here. Melinda McLaughlin, the guest today, is going to really provide some unique perspectives, given that she is an economist. And that theme is long and variable lags. This is usually a phrase that refers to monetary policy. However, it acutely applies to the warehousing market, given that there is first a demand impulse and then that's followed, in the warehousing market, by construction, which can take six months to two years, and naturally lends itself to long and variable lags.

Ben Dean 1:34

For today's episode, I think Flexe's network offers a unique vantage point because we represent 2,000+ warehouse operators. We're going to be able to get access to some data points that exist outside of the traditional leasing market about the state of play in warehouse. Excited to be able to bring that to bear.

Karl Siebrecht 1:52

Let's kick this off with my conversation with Melinda McLaughlin, who is the Global Head of Research at Prologis. As our listeners probably already know, Prologis is the world's largest owner of warehouses, with over a billion square feet globally of warehouse space. So I'm super excited to get Melinda's perspective on the state of the warehousing market. So let's do it. Melinda, welcome. Thanks for being here.

Melinda McLaughlin 2:21

Thanks for having me.

Karl Siebrecht 2:22

I would love to start, if we could, if you wouldn't mind just giving us a little bit of your background.

Melinda McLaughlin 2:28

Absolutely. So as you mentioned, I'm Global Head of Research, so I oversee a global team. And I've been with Prologis since 2015. It's been quite an interesting time in the industry. But my background is, I studied economics, real estate, I did consulting for nearly eight years through the global financial crisis. So I've just found my way to a lot of different roles that allowed me to continue learning, growing and studying what's interesting.

Karl Siebrecht 2:55

That's fantastic. If we could just start at the very high level. Give us a sense, is the market today for warehousing, is it more of a tenant's or landlord's market? And why?

Melinda McLaughlin 3:09

It's a good question. I think THE question, right? My unsatisfying answer is, it really depends. So high level, in most places, it's definitely easier to find space today than it was a year or two ago. Pandemic era, scarcity was extreme due to a high level of demand, and difficulty bringing on supply at the same time to meet that demand. But today, we stand at about 4.8% vacant space in the US market in aggregate. So it's still really a landlord's market. That's low relative to history where we've seen, throughout cycles, about a 6%, a little bit above that vacancy rate. That said, today we are seeing better opportunities for occupiers as projects that were started about 12 or 18 months ago are finally coming online. However, new supply is highly concentrated. So it's located in specific markets, even specific sub-markets, and even size categories. So your experience out there is really going to depend on what you're looking for.

Karl Siebrecht 4:11

Okay, so we've seen some bounce back from the COVID era, which was a bit extreme. But it's still a pretty tight market. So maybe, could we peel into some of those sub-sectors that you refer to, there are some particular markets and or sizes that might be tighter, harder to find space than in others. Could you give a little more color on that?

Melinda McLaughlin 4:36

Absolutely. So if we look back, remembering the surge in sales, and then the subsequent shortage and then surge in inventories, that really resulted in bigger being better in most locations. So developers of logistics real estate responded to that demand accordingly. So today, again, because it takes a while to bring the building online, today occupiers that are looking for larger spaces in outlying sub-markets of inland locations, so these are markets like Dallas, Atlanta, Chicago, Houston and Phoenix, they might find some better opportunities there. On the other hand, we're still seeing acute scarcity in some markets, especially those with high barriers to new supply; places like Toronto, the Lehigh Valley in Pennsylvania, Las Vegas. We even still see really low vacancies in some smaller markets like Portland and Reno. If you get down even to the sub-market level, in these large metros, there's essentially no new deliveries of kind of smaller urban infill product. So as we see customers kind of turn back to revenue generation and try to get close to end consumers, we expect to see some persistent scarcity in those types of units as well.

Karl Siebrecht 5:52

Interesting. Okay, very helpful. And so then if we turn to new construction, kind of the state of new construction, would it be safe to assume that in some of these areas that you just described as being a bit tight, are those where new developers are looking to invest in new capacity? Or is that not necessarily the case? What is the state of new construction? And what are the underlying drivers of those investments?

Melinda McLaughlin 6:20

Well, I think there's the longer-term trajectory and the driver would be, I think the availability of land and the difficulty navigating some of these regulatory hurdles. So both of those things have become more difficult over time. So when I talk about kind of smaller urban infill spaces, I'm in San Francisco, so getting kind of as close as you can to the city center, extremely difficult to bring new product online. First of all, all the land is spoken for. Second, if there is a building that you could maybe redevelop, reposition, it's very expensive, and then the regulatory hurdles to make that happen, especially for logistics real estate, which, unfortunately, is nobody's favorite land use, can just make it nearly impossible to bring on new product. So while we definitely see demand, last cycle and expecting kind of a return that way in the next cycle, being concentrated in those areas, there really isn't an ability to bring on new supply. The new construction is still, I think, calibrated to the pandemic-era trends where again, it's kind of bigger, there was less urgency as far as being close to end consumers and more emphasis placed on being close to ports of entry and along those transportation routes.

Karl Siebrecht 7:39

Okay, so those dynamics are playing out still currently, in terms of where you see more of the new investment being developed?

Melinda McLaughlin 7:50

I think because, again, there's a lag sort of when you start it, and that lag had grown over the pandemic, so the average time it takes to deliver a building had been lengthening. So yeah, absolutely, developers were concentrated on pandemic-era demand trends, bigger spaces that can handle a lot of activity, right on those transportation routes. Because the way I put it, at that time, that was the primary concern of supply chains, right, getting your hands on the goods. Once you had things to sell, because demand was so high and there was so much disruption and dysfunction in supply chains, that's where we saw no discounting, right? You could have longer delivery times, consumers would wait for it. And it really reflected itself on the logistics market. As we look to the future, my major kind of cutting edge trend that I'm watching is this return to revenue generation, to competing for revenue. So that happens through service levels, making sure you have the goods consumers want, a lot of choice, reliability, and then competing on service levels like delivery times, fast ones, white glove service, all those elements that make up for a superior customer experience. Because again, during the pandemic, I think retailers in particular, had a lot of wiggle room with consumers in an era of shortage or just happy to have the good that you want to buy.

Karl Siebrecht 8:10

Right. So in that potential trend of return to revenue growth in the warehousing market, does that mostly manifest itself in direct to consumer ecommerce fulfillment facilities, or does that also extend into more traditional brick and mortar retail distribution capabilities as well?

Melinda McLaughlin 9:40

I think it extends across supply chains. So to have that superior omnichannel experience. We talk a lot about the future of retail. It is 100% omnichannel, it's tech enabled, it's transparent, it's visible. We're seeing more that it's sustainable. All of these things, again, probably weren't a top priority over the last couple years because of the supply chain disruptions. Today, it's direct to consumer, so getting close to end consumers for last mile delivery and operations like that. But in the brick and mortar space, you see it through really strategic placing of inventory, and again, making sure you have that built out, flexible, and tech and data enabled network.

Karl Siebrecht 10:24

Makes sense. Let me shift gears just a little bit on the same broader topic. You hear a lot, read a lot over the past couple, few quarters of onshoring or nearshoring, it seems to be a trend. Do you see any impact on the warehousing market, let's just say in the US today, that is being impacted, or being driven by that onshoring or nearshoring shift?

Melinda McLaughlin 10:50

I think it's early. But we've definitely dug into this. We are watching the way production shifts around. The direct effect in our business is most visible in Mexico. So we've studied this, it's a big demand multiplier there. And so we're seeing really ultra low vacancy rates and strong rent growth along the border as a result. In the US, it's a little more nuanced, because it's so highly targeted at certain industries. In a specific example, we looked at the impact of TSMC, the semiconductor investment in Phoenix. Obviously, this is still unfolding in real time. But the early data we found suggests that it's going to lead to, yes, an incremental uptick in demand for leased space in this market. But I think the bigger effect is going to be the removal of land and buildings from the competitive base. So when you think about manufacturing, these are really mission critical facilities, high fit out, often very customized, and manufacturers prefer to own these facilities. So as we looked at RFPs in the market in Phoenix that were related to semiconductor manufacturing, really only about a million square feet was leased space that they were looking for. At least 12 million square feet of RFPs were for purchase. So either land purchase or building purchase. So that means, for those logistics customers who might want to expand in that market, they're going to face less choice, because a lot of that vacant land or vacant buildings will be sucked up by this manufacturing activity. And that's just the direct effect. Then as this unfolds, we're going to study the effects on consumption, the labor market and the local economy and we could see an additional boost there. And so, net-net, those aren't big numbers for the US market in aggregate. And again, it's going to be very highly targeted by location, highly targeted by industry. But where we expect to see that show up is actually in a worse availability of land and buildings for logistics uses in some of these micro-locations.

Karl Siebrecht 12:58

Right, and potentially, this came up in our other conversation, potentially also competition for labor. So where specifically, in the US, where are you seeing the greatest increases in rent?

Melinda McLaughlin 13:10

We saw rent growth continue through 2023 in most of our markets. Where we saw the strongest momentum was really along the Sunbelt in parts of the Mid Atlantic, and maybe surprisingly, in the northern California region. I know this is a US focused group, but Europe and Mexico also have really good momentum.

Karl Siebrecht 13:29

Looking forward a little bit, what are some of the risks that you're watching most closely?

Melinda McLaughlin 13:36

Well, I'm sure I'm completely unique here, but I'll be watching the Fed and consumers. And I think, you know, the Fed is one of those things that I think most people try not to do too much predicting about. But as we look at consumers, I think there's positive and negative risks that we're watching. So on the positive side, we have wage growth exceeding inflation again. So that's been one reason why, as recently as September, we've been surprised to the upside on retail sales. So that's not pent up savings. That's real purchasing power growth. And it's supported by a lot of underlying demographic trends. Millennials are now in their 30s and 40s. That's peak spending, that boosts goods consumption. Wage growth has been really strong for the lower and middle income households. And those households tend to translate wage growth more directly to spending and spend more on goods versus higher income households. So there's a lot happening that could be seen as optimistic for users of logistics real estate and the flow of goods. On the negative side, we're definitely watchful for the delayed impacts of higher interest rates. Energy costs are on the rise again. And then there's a few areas of government support that are ending, such as the resumption of student loan payments. So we're going to be watching those risks on the margin. And then naturally, at the end of the day, what the Fed does is going to impact both consumers and businesses. So again, I'm probably not unique here, but I really think right now it's about the cycle and really calibrating expectations to consumer health.

Karl Siebrecht 15:12

Right. Consumer health consumers are what, two thirds of the US economy or something like that? It's about that. Okay, so then as we think about what's coming in 2024, one thing that strikes me in listening to your observations is, there's a bit of a balance at play here. On the one hand, we're seeing a return to revenue focus, trying to serve consumers better to maybe drive some market share gains. And then on the other side, given the puts and takes around the economy, broadly speaking, there are a lot of businesses that are still kind of in a wait and see mode. Did those things translate into your view into 2024? Is it still some puts and takes or what should we expect for the year to come?

Melinda McLaughlin 15:58

Absolutely I think that economic growth in this cycle matters a lot right now. I think stepping back to what changes things in our business, it's really that supply chain prioritization. So the order of operations, what's most important to everybody out there trying to operate a distribution network. And I think right now, there's a disconnect between what you need near term and what you need long term. So in the near term, what we're seeing is absolutely higher interest rates, it's putting increased scrutiny on capital expenditures. And that just makes it harder to adapt supply chains for long term structural needs, particularly as we see market conditions aren't poised to get that much easier through the near term. And we can dig into that in a moment. But on the structural side, that return for competing for revenues, as a focus, that's what you should be thinking about for the long term. Consumers increasing their standards and making those supply chain investments that can yield better customer service. And at the end of the day, I think it's those investments that are going to separate the winners and losers over the long term. What I see and hear from customers is they're really trying to navigate a lot of pressure in the near term, so that they can adapt, have better resilience in their supply chain, because I don't think we're going back to the just in time, very uneventful world that we used to operate in. But in the near term, it is a challenging environment, just from an interest rate perspective.

Karl Siebrecht 17:34

Yeah. I love that framing, there's just a disconnect. And this resonates so vividly with conversations we have with our customers as well. In the near term, there is this fairly fraught environment to navigate with interest rates, with uncertainty around consumer spending, and just the drivers of your own top line, but an absolute high level of conviction around, we have got to evolve our supply chains to be more resilient, more digital, as a means to that end, more sustainable, as well. And so how do I navigate this near term concern with medium to long-term upside and opportunity there is for us? I know you don't have a crystal ball and you're an economist, but how does this play out over the coming years? You know, the macro economy gets better sooner than later, right? It returns to norms, and then investment in supply chains probably starts to accelerate to get these longer-term outcomes we need. Is that a too simplistic way to paint the picture? How would you give us some color around that?

Melinda McLaughlin 18:34

I don't think it's too simplistic. I mean, at the end of the day, one reason I love economics is it's just about supply and demand. So it can always be boiled down pretty simply. And what we're seeing, and I think it's important to understand, the demand side is what everybody's watching. That's interest rates and consumers and confidence. But on the supply side, the things that have been happening with interest rates and continued pressure on costs, whether it's labor, you know, the materials, competition for those manufacturing facilities in the infrastructure investment has kept construction costs high. So in my space, logistics real estate, we're actually seeing some pretty dramatic things on the supply side as well to consider. So new groundbreakings of new buildings are down 65% relative to the peak levels of last year and continue to fall. A lot of that has to do with interest rates, but it's really the rent you need to justify the risk of breaking ground on a new speculative building. That equation has just fundamentally shifted and very, very quickly. So as we see this playing out, that scrutiny on capital expenditures, maybe a little bit of uncertainty about the sales outlook, that's causing a lot of these expansion decisions to be delayed, kind of kicked down the road. And what we're undergoing in the logistics real estate market is a wave of completion. So now is actually probably the best time in quite a while to be out there, especially leasing new space. So again, a disconnect, right, you've got the pressure, don't lease a new space, don't invest the capital there. But it's kind of the best time ever. Because after that, because new groundbreakings have fallen so quickly, that faucet's going to get cut off. And we think that's going to happen kind of late 2024. And that could reintroduce a lot of scarcity. And sort of at the time many customers and companies will start to feel comfortable again investing for the long term, there might not be as much optionality out there in the market. You know, I think I'm pretty honest with my advice to those looking to lease space is, take advantage of the next four quarters, because there is a drop off in new supply coming that we can see quite visibly in the numbers that, again, all of this is kind of going back to the same thing, which I think was that sharp increase in interest rates we saw beginning in 21, or after the end of 21.

Karl Siebrecht 21:04

Right, right. Okay. So also on the supply side, I want to come back to something you mentioned a little while ago about just some fundamental elements of scarcity in some markets, like there's just not much land left, or the land that is there is too expensive for use as a distribution asset. So what happens with that? What is the three, five, out year or beyond supply side outcome of that? Do we get Inland Empires outside of a bunch of additional cities? Where does this go?

Melinda McLaughlin 21:37

I don't know for certain, but there are a few things I've seen in my time studying this industry. One is pricing just responds, right, if there's enough demand in an area, pricing needs to respond to make development or redevelopment appropriate. So a couple examples that Prologis has done specifically are those multi-story warehouses in places like Seattle and New York and LA. So those are places where land is very dear, there's a lot of supply chain activity. And there's a real benefit to being close in, avoiding the congestion getting close to that end consumer, those high-income households. So one option is pricing response. And with a big lag because these projects take a very long time to get entitled and navigate those regulatory hurdles. There might be some additional, more functional supply that comes online. But it'll be small. Because again, this is an incredibly difficult operation, you need a long timeline, you need good relationships with the local community, and regulators. And I think that's been another facet of the environment that's been so interesting to watch over the last eight plus years that I've been at this company, and it's really the resurgence and proliferation of kind of anti warehouse regulatory sentiment. So a lot of resistance, even in sort of traditional logistics hubs like the Inland Empire. We see it today in New York, New Jersey, Maryland, Pennsylvania, Seattle. And most recently, and this really surprised me, there's been some pushback in Dallas, as well. And that's typically an environment where anything sort of goes. There seems to be a little bit more growth friendly sentiment, but there is starting to be this broader movement that's going to make it more and more difficult to bring product online. So at the end of the day, I don't know actually where this supply is going to come from, because there's a ton of demand for not just more space, but more sophisticated space. Space that can incorporate technology, space that can help companies meet their net zero goals, space that can adapt to, if transportation changes with the electrification of fleets. Those types of products today are completely under supplied. And I don't know that the world will adapt enough to really make it fully balanced in the future.

Karl Siebrecht 24:10

That makes sense. Melinda, this has been fantastic. I feel so much smarter now than I felt at the beginning of our conversation. Great insights on the market for our listeners here, from your perch there as the Global Head of Research. It's clear you have a great view of what's going on and a lot of insight into how we should be thinking about it. So thank you so very much for joining us.

Melinda McLaughlin 24:31

Thank you for having me.

Karl Siebrecht 24:34

Okay, well as expected, that was a great conversation with Melinda McLaughlin. One of the things I loved most about that conversation is she just articulated, look, I'm an economist. To me, this is really about supply and demand. And in this market that she's now been working in for, I think she said about eight years, there's tons of data out there about supply and demand and so we can think about what are the implications on pricing, as well. So Jordan, what's your takeaway?

Jordan Lawrence 25:01

Yeah, I don't have any of the credentials. But I'm also an economics junkie. So here's the latest data actually fresh off the Q3 releases from the biggest real estate players. On the demand side, 50% drop year over year in absorption. On the supply side, over 170 million square feet added, which is a record delivery total. But the kicker, the nuance here, is on pricing. Prices continue to rise despite that backdrop, and I think a little bit of that is part of where we've come from. We came from a place of record tightness. Now we're maybe moving back up towards a normalized trendline. But still pretty shocking to see the pricing action given this backdrop of supply and demand.

Ben Dean 25:47

Incredibly interesting, right, it is a question of supply and demand. But the thing I think that's missing from that conversation is your indicators on demand. There's inventory wind-downs are occurring and continuing. The absorption is going down, so though supply is still at historically relatively lower levels, we're at some 5%, 6% is systemic that you can see, according to a lot of the prognosticators. That, I think, is an interesting point here, is it's like unemployment, there's a systemic number that creates a equally balanced marketplace. And it looks like the brokers predict that it's somewhere higher than where we see it, because what we believe to be true is that there are additional products and segments of supply that are in high demand and some that are in lower demand. I think Melinda's spoke to that as well, in terms of different facility types, locations.

Jordan Lawrence 26:43

I think in support of your point, there is the sublease market, which, while it does not represent a large portion of the total warehouse market, it is an indicator of what's happening. And the sublease activity in this past quarter was the highest it had been since, get this, the global financial crisis. So I think that is indicative of a market that is softer at least than where we came from. And it is bringing more options to potential occupiers, not just the traditional Greenfield and traditional new site, but also there is a sublease opportunity.

Ben Dean 27:18

That is a headline that is buried, the sublease market. I was running this against some of the biggest markets, as well. Los Angeles proper sublease market is at 0.84%. It seems tiny. That's 3x where it's been at any point in the last 10 years. Sublease activity is way up, the supply of sublease activity is way up. We are seeing, within the Flexe network, record amount of former customer and shippers that are coming in listing their space with us. We have 300 plus facilities of traditional customers and shippers that want to be acting as 3PLs in this market. I think this is an entire iceberg that's sitting below the surface.

Karl Siebrecht 27:18

Right. So Ben, what are you seeing within the Flexe network data? What does that data tell you?

Ben Dean 28:13

Yeah, so there's an interesting compare and contrast here. So first, I'd like to delineate that Melinda's talking most specifically to the direct lease market. And there are other approaches and products available out there to folks who are looking to access warehouse services in the space. So within our network, which is existing 3PL operators, when we've taken projects out to bid recently, we're seeing a great deal of supply in the marketplace. We took a project out in Jacksonville, that was 125,000 square feet of capacity in an urgent need this last month. And within a day we're able to get back three bidders all with over a quarter million square feet of capacity to support that need. And that's not exceptional. We're seeing that across markets, especially to Melinda's point, inland markets. There's a great deal of oversupply. So what I think to be true is, when you combine that underutilized space within 3PLs, when you talk about the sublease market headlined by Amazon's attempts to get out of their own leases, there's a huge iceberg sitting under the water here of available capacity that's not showing up in vacancy rates.

Jordan Lawrence 29:26

You know, just to kind of latch on to something that you're seeing here, Ben, and bringing this back to what I said at the top before the conversation about long and variable lags. You know, this is the fundamental challenge in the warehousing market. You know, if you take a step back from Q4 of 2020, all the way through 2022, there was a demand shock for warehousing space. Shippers gorged on space because they were reacting to consumer demand. Lo and behold, they bought too much space, the consumer demand impulse that they were reacting to has maybe normalized, but they're still sitting on this space. And so if you look at the historical absorption data in the warehousing market, starting in the first quarter of '23, there was a dramatic drop off. The absorption rate is down 50 and 60%, year over year, throughout the year of 2023 if you look on a quarter-by-quarter basis. And so this just speaks to the dislocation that happens with this traditional approach where you say, I'm going to look at demand, and then I'm going to make a five, seven, ten year decision around that demand and try to match up my supply. And by the way, I might be building something that takes me six months, 18 months, even two years to complete. And this is where you get all of the inefficiencies that we really see playing out today in the warehousing market.

Karl Siebrecht 30:48

I think that's spot on, Jordan. This is also impacted by something that we're all feeling and again, Melinda pointed out, is just that the state of the macro economy today is uncertain. Right? Consumer demand is okay, the unemployment rate is okay. But there's not a lot of optimism out there. So what that means right now across many companies is, people are in a wait and see mode, which also says that, you know, there's a lot of underutilized capacity out there today. Under lease, but underutilized.

Ben Dean 31:26

I also thought it interesting that Melinda mentioned a couple of competing priorities in organizations where they have these long-term strategic goals about building in supply chain resilience, shortening the last mile, themes we've been talking about for a while. But then the economic indicators and interest rates are saying, there'll be a soft market through at least 2024. Hold off, wait and see. How do you balance those competing priorities?

Karl Siebrecht 31:52

It's such a great question and the way that Melinda phrased that, I thought, was spot on. And of course, we're seeing that with a bunch of our customers and what I would offer and what we're seeing a lot of is, don't push the pause button on the strategic initiatives. If there are ways to take a more incremental approach, a more test and learn approach for some of these strategic initiatives, the market that we're currently riding through could still support that, as long as those tests don't come with significant long-term bets or significant near term capital outlays. That's a way to keep momentum behind that and potentially start to separate from those you're competing with.

Jordan Lawrence 32:36

Maybe just to button this up with a data point. Early in the cycle in the industrial real estate space is new groundbreaks, new construction projects that begin, and that tells you a lot about what's going to happen over the subsequent quarters. And this is why Melinda acutely zeroed in on this, and many others say, the market's going to remain loose through the end of 2024. I think a really interesting data point is that new ground breaks are down 65% year over year. And a lot of this, of course, is the product of what's happening with interest rates and the cost of capital going up. But it speaks to a tightness that is going to be baked in, especially as we come to the end of next year.

Ben Dean 33:18

It is really important to differentiate that there's not one warehousing or industrial real estate market, right. There's geographic trenching, but there's also within particular markets, in Los Angeles and the Inland Empire specifically, there's a lot of softness in the big new class A buildings out east of the city. But it's near to impossible to find facilities that can service that same-day, hyper delivery customer that we've talked about in previous episodes within Los Angeles itself. And we saw the same thing in our data. When you look at class A buildings, there's a lot of class A buildings that are underutilized, aggressively seeking bids, and older, smaller class B to C buildings, which I was frankly surprised that they would be running at a premium, it's more expensive to get that space. There's less capacity in that space as more and more companies have really shortened that last mile. That one was the most interesting to me that aligned to what Melinda was saying is that finding yourself a hyper urban hyperspeed fulfillment center might be more difficult than that big box on the edge of town. Jordan, any thoughts there?

Jordan Lawrence 34:34

I can support this with a data point, which is usually my shtick. So if you take a look at the LA market and vacancy rates there, you're really looking at a very tight market, which might seem surprising to people that know about Southern California. But if you zoom out a little bit and you take a look at the Inland Empire, you're at north of 7%, you're in one of the more systemically looser markets. So there is a lot of nuance relative to exactly where the building is. Are you close to a city center? Or are you in an area where regulation and, frankly, land allows you to deploy more assets? And if you compare the Inland Empire to Dallas Fort Worth, you see the same thing. Matter of fact, pretty much every market in Texas is at north of 7%. And this is because there's been a tremendous amount of development activity. But when you really get into tight and constrained markets, Melinda brought up San Francisco, for example, you're still at sub 3%. So there is a lot of nuance based on the precise location and ultimately, what are the objectives you're trying to achieve? Is it a micro fulfillment center? Or is it a larger omnichannel facility that can be set outside of the city?

Ben Dean 35:43

Jordan, while I'm generally agreeing with you on the Texas statement, another interesting nugget is that Laredo, your cross border location, is at under 2% vacancies and there's zero new starts or active construction in McAllen next to it in terms of warehouse builds. So really excited at some point to start talking more about these nearshoring reshoring places, because I think there's something going on down south.

Jordan Lawrence 36:11

Great correction, first of all, Ben, and that should tie in really nicely to some upcoming conversations we're gonna have here on the podcast.

Karl Siebrecht 36:18

So Ben, Jordan, what a great conversation. Ben, particularly appreciate your ability to bring some data insights from the Flexe network of operators. It really goes to show you and Jordan, you added this perspective as well, that the state of the warehousing market is highly variable depending on what you're trying to get done, what your strategic initiatives are, what your cost constraints are, and where in the market you're looking to add operations.

Jordan Lawrence 36:44

I think it's definitely a nuanced picture. If we've learned nothing else, it's that the answer is really what Melinda started with. It depends.

Karl Siebrecht 36:53

Thanks again, guys. Always a pleasure. Let's keep this conversation going.

Narrator 36:59

You've been listening to the Logistics Leadership Podcast presented by Flexe. If you'd like to learn more about the podcast or join the Logistics Leadership community, check out this episode's show notes and visit flexe.com/logistics-leadership-podcast. Keep the conversation going: Email us at leadershippodcast@flexe.com. The Logistics Leadership Podcast features original music by Dyaphonic. The show's producers are Robert Haskitt and Adam Kapel. Here's a quick pro tip: Instead of chasing down the next episode, why not just follow the show and have it appear in your feed automatically. Thanks for joining us!