“A good economist should tell you what could go wrong,” started K.C. Conway, SunTrust Banks, to industrial commercial real estate’s leaders at I.CON: Impact Projects. On the top of his list? The Fed and monetary policy, security and terrorism, of course, but also millennials’ slow entry into the economy (this still-living-with-parents generation is almost a decade behind entering the market as home buyers), and the return of the “Old Testament” worries: hurricanes (remember last year’s Hurricane Matthew?), floods, plagues (Zika virus – could the mosquito travel from warehouses in Florida northward?) and pests.
In Conway’s remarks, and in his new white paper, “It’s a Small World with Big Economic Challenges,” he details two driving factors in the trend toward isolation: 1) Unresolved matters since World War II, when nobody did a satisfactory job in restoring trade and political policies, both across Europe and globally; and 2) Disruptive technologies. Popular rhetoric says it’s trade agreements that have harmed the job market most – in truth, jobs have been replaced by disruptive technologies that are not only eradicating labor and manufacturing jobs, but also white collar jobs. As Conway puts it, “Anything that can be put into an algorithm replaces humans.”
The emerging markets that outnumber the GDP markets are going to create a lot of volatility. US, Europe, China – top three. There are 10 with less than 1.5 million GDP. China is the number one purchaser and user of robots in the world. And while the U.S. and Europe control over half the world’s GDP and wealth, the two largest countries by population are China and India. Conway says we need a twenty-first century “Marshall Plan” to help growing markets contribute to the global GDP.
And what are the implications for commodity prices, like oil and agriculture, which are principally priced using the U.S. dollar? Don’t be so quick to dismiss the cryptocurrency known as Bitcoin – viewed as a way to neutralize currency manipulation (The biggest manipulators? The U.S. and China.) and disrupt monetary policy. The top five cryptocurrencies in circulation today represent a market capitalization that has grown to approximately $12.2 trillion U.S. dollars – or two-thirds of U.S. annual GDP.
Other trends K.C. noted:
- The supply-chain shift is good for East and Gulf Coast ports and Canada (Port Rupert and Vancouver), but not so good for the West Coast. The Ports of Los Angeles and Long Beach are still very relevant, servicing 40 million West Coast-based consumers.
- The shift to digital currency to mitigate monetary policy. Manufacturers, commodity owners and retailers can no longer manage in a global economy with so much currency manipulation by central banks – the U.S. and Fed are just as guilty as China.
- E-commerce is dependent on growth of a reliable rail model with trucking as the short front-end and final-mile mode of transportation. Every $1 billion in added e-commerce sales = 1 million square feet more warehouse.
- Shipping consolidation will take us from four alliances to three, and from 20+ shipping companies to fewer than 10 during the next 5 years.
- As much as 40 percent of North American warehouse inventory is functionally obsolete – low clear ceiling height, inadequate truck courtyards, not located near intermodal, etc.
- No longer do we need to chase cheap labor around the globe to manufacture. Technology is manufacturing’s answer to so many challenges
- The bifurcation between the industrialized economies in the West and the emerging economies is growing worse. There are only 3 economies with a GDP in excess of $10 trillion annually (U.S., European Union and China).
It may be that there has never been a more perfect time for industrial real estate – occupancy rates are going up, rents are soaring and demand is outpacing supply. So why have transactions reduced by 23 percent? The convergence of retail and industrial into a single property type. Traditional retailers are spending more in converting stores into multi-use facilities than they are opening new stores or remodeling.
This is part one of a multi-part series from K.C. Conway’s presentation at I.CON: Impact Projects. More coverage from his insightful remarks to come – be sure to subscribe the the Market Share blog.