JLL Experts Share Vision for Industrial Sector in 2020: Is E-Commerce Pandora’s Box? Will NJ Run out of Industrial Space?

JERSEY CITY, NJ – The Luncheon Keynote Address at CAPRE’s Industrial Revolution in Jersey City was a forward-looking fireside chat with two thought leaders from JLL. “2020 Vision and the Industrial Sector” featured the perspective of JLL’s Walter Kemmsies, Economist and Chief Strategist, as well as Ryan Severino, JLL’s Chief Economist. Moderator Brian Klebash kicked off the session with an essential question about a topic that turned into a recurring theme that day.

“Let’s talk about the evolving Asian supply chains, which is increasingly moving away from China and into emerging markets,” suggested Klebash. “What does that change mean for the United States?”

Kemmsies offered his take first. “We’ve seen companies increasingly begin to move out of China. If you go back 15 years, Vietnam and India were barely in the top 10 for imports to the U.S. Today, India is the second largest import country. Vietnam has risen to, I think number four,” he began. “Part of this isn’t necessarily politics. Part of it is globalization, which is ongoing. Everyone talks about the world as it’s fully globalized, but I can tell you that it’s not. So there’s a lot of, not necessarily off-shoring, but new-shoring going on.”

“A lot of it is encouraged by our government. If you look at what the U.S. imports, out of the 899 commodities that are classified, China has a 100% market share for half of them….so if you drop politics for a minute, it still doesn’t make sense for one minute to have so much coming from one place,” he explained. “Did we learn nothing from the tragedy of Fukushima? When that happened, and some of the factories shut down, they shut down global auto production. That’s when we learned to start spreading production capacity to Thailand and other various parts of the world. That’s what’s going on today.”

Walter Kemmsies, Economist and Chief Strategist, JLL presents the keynote address at CAPRE's 7th Annual Northeast Industrial Real Estate Summit, held on March 14, 2018 at Maritime Parc in Jersey City, NJ.
Walter Kemmsies, Economist and Chief Strategist, JLL presents the keynote address at CAPRE’s 7th Annual Northeast Industrial Real Estate Summit, held on March 14, 2018 at Maritime Parc in Jersey City, NJ.

As it turns out, the West Coast ports aren’t very connected globally. “They’re heavily concentrated on [trade with] North Asia – that’s China, Japan, Korea, Taiwan and Hong Kong. East Coast ports are much more highly connected. New York City and Savannah are listed as the 37th and 38th most globally connected ports out of 960 by the United Nations,” shared Kemmsies, who then pointed out that if you leave China on a trade ship, you’re more likely to end up on the East Coast than on the West Coast. “But the West Coast today is down three or four percent. The east coast is up five or six percent. The data, everything in that, seems to be coming to a trend – the West Coast is losing its share, especially since Trump started the Trade War a couple of years ago.”

“Ships are getting bigger,” observed Klebash to the pair. “So what is the impact on the ports of these ships transporting more and more goods and materials? What does it mean for our port locally as well as the ports up and down the East Coast and West Coast?”

Kemmsies then revealed two major takeaways. “With more goods being traded, it’s easier for the carriers to fill bigger ships more fully. If you double the size of the ship, you don’t double the fuel consumption, and fuel is the biggest cost. So your per-slot cost is dropping. And with higher levels of global trade, you can keep your ships pretty full with various groupings of ports, and that’s where the big ships are being introduced. If you can’t keep the ships full, there’s no point in building a bigger ship, because you’re going to lose money. As we look at trade with Asia, which has hit very high levels, we’re introducing larger and larger ships.” Kemmsies then pointed out that the growth of these ships and the growth of certain ports has caught a lot of port managers by surprise, resulting in a lot of congestion.

Klebash then pivoted the discussion to a different, but equally important, topic — the shift from truck to train. “What is the opportunity for how to invest in rail infrastructure?” he posed.

“The demographic trends for the U.S. aren’t good. Based on what we’ve seen from the U.S. Census and in U.S. immigration, our working age population is going to grow at about .2%-.3% for the next ten years. We don’t have enough labor. We’re going to have chronic labor shortages. And the industries that treat their laborers the worst are going to have the hardest time finding employees. One of the worst is trucks — truckers are monitored electronically. When the clock starts and the clock stops, you have to take a mandatory break — even if you’re in the middle of a tornado in Kansas or if you’re in a bad part of town. You have to stop and wait. So it’s not great working conditions. The pay isn’t that great. The average age of a driver is 52-54. In five or six years, there are going to be drivers. Young people just don’t want to take that job. So what can you do? Well, look at the railroads. They’ve been eliminating all of the smaller routes, trying to move more cargo to fewer places. And they’ve been developing near the ports.”

Kemmsies then shared that ports all over the eastern seaboard are already hopping on this trend, while some announcements on the west coast are forthcoming. “We’ve been seeing a lot of demand from both developers and occupiers for rail-served properties,” he added.

“Ryan, do you think there is a risk of running out of land for the industrial sector in New Jersey?” asked Klebash, looking to Severino for the first time.

JLL Chief Economist, Ryan Severino, participated in CAPRE’s New Jersey Apartment Summit on December 4, 2019.

“The brokers I work with in New Jersey would tell you, somewhat facetiously, yes, in terms of contiguous, big, meaningful blocks of space. As I like to say in meeting with them, it’s a kind of a “high-class” problem to have,” joked Severino. “But I do think there are very significant limitations on those kinds of meaningful blocks of space anywhere around here. It’s one of the reasons I’ve been working with a bunch of clients on actually developing multi-story distribution facilities. Because if I have to go out and build it, I might as well maximize the value of the land. You have to spend the money on the land and spend the money on the construction. I don’t know that we’re ever in danger of getting exactly to zero around here, because there’s always some frictional turnover. But we’re at a point where there is so much demand relative to the supply available that it’s fair to say we’re at a fairly limited capacity right now. There really isn’t a good way to drop a good property in the sub-markets you want to be in, unless you want to consider, at a minimum, razing something. Those parcels just aren’t available and certainly not at a cost that makes sense. It’s hard to imagine the market getting tighter.”

Next, Klebash zoomed in on e-commerce. “Is e-commerce demand unending?” he asked. “What could  this change mean for e-commerce providers?”

“Ten percent of our retail sales are e-commerce,” answered Kemmsies. “Last year in the fourth quarter we were almost at 12%. As this spreads to other companies, they’re going to need a lot more distribution centers. It’s a whole different operating model. I can’t imagine the impact this will happen over the next three, five or seven years.”

Severino then piggy-backed off these comments to offer some perspective. “I think that if you look at the space right now, one of the things that gets lost is that if you’re just looking at pure e-commerce, then yeah, that constitutes a very large percentage of the demand. But there are still other providers, like third party logistics firms, that also somewhat participate in e-commerce. There’s this phantom layer of demand out there that’s still driven by e-commerce. I try not to be hyperbolic, but to Walter’s point, if you look at retail sales, it’s still a minority of retail activity that happens online. But just look at the carnage that it’s causing in the retail sector. Think about that persisting for the next 10-15 years and what it’s like to do in terms of this shift from actual brick and mortar. I’m not a naysayer about retail in aggregate, but I do think that the benefit of this, is the impact it will have on the industrial sector. This Pandora’s box — I don’t think we’ll be able to close it.”

The panel then concluded with Klebash asking Severino to share his general economic outlook for 2020. “Our official house view is that we’re not overly optimistic, but cautiously optimistic about the outlook for next year,” stated Severino. “I think undoubtedly there are things going on in the economy that are problematic. Investment on the part of private enterprises are pulling back, which is concerning. But the consumer remains incredibly strong, driven by the tightest labor market we’ve objectively seen in half a century by some measures (and by other measures, we’ve never seen the labor market this strong). I do think that is pretty difficult to sustain going forward — this robust level of spending that we’ve seen from consumers.”

“So the question is, might there be a kind of contagion from the kind of pessimism that the investors are feeling that might lead consumers to pull back a bit? I don’t see that as the base case, but objectively, growth is likely to slow down next year,” continued Severino.” Through the first three quarters of the year, growth will slow. But I don’t think we’ll hit the stall speed. The question will be, what happens after the election next year and the first quarter of 2021? Will the election impact how people view the economy, based on who wins? There is a part of the electorate that will base decisions, and whether to pull back economically, on who wins the election. I’m not a political scientist and I’m not a pollster but the ones I pay attention to would objectively say that it’s going to be hard to predict who is going to win next year and there will be some of that filtering happening.”

Severino then added that geopolitical risks are also worth paying attention to. “There’s no shortage of geopolitical risks today,” he ventured. “I think that objectively we haven’t seen this level of geopolitical risk in decades, probably since the end of the Cold War in the late 80s. Compound that with some of he other things going on, it’ll be interesting to see where we end up this time next year, as we are heading into 2021.”