JOC’s Alessandra Barrett interviewed CenterPoint Properties’ Senior Vice President of Asset Management Bob Andrews for the “Beyond TPM” podcast.
Listen to the full interview, or read the transcript of the conversation, which covered CenterPoint’s acquisition and development strategy on the West Coast, the types of industrial real estate companies are flocking to as e-commerce demand continues to put pressure on the nation’s supply chain, and how Bob reads the tea leaves for industrial real estate’s future.
JOC:Global supply chain and logistics industry leaders gather, connect and exchange ideas at IHS Markit’s annual TPM Conference, organized by the JOC. In our new podcast series, Beyond TPM, we keep those conversations going, taking a deep dive into critical, rapidly evolving topics and the insights uncovered this year at TPM21.
Today I’m speaking with Bob Andrews, CenterPoint Properties senior vice president for asset management on the West Coast.
CenterPoint is a leader in logistics, infrastructure and transportation advantaged real estate and a familiar name to many of our listeners and JOC readers. The company has identified key coastal and intermodal markets within them methodically and strategically developing, acquiring and managing properties.
Bob, can you tell us a bit about your role within the company and the West Coast strategy?
Bob Andrews: I currently oversee the leasing and management of 95 properties. These properties total more than 900 acres, and it’s more than 16 million square feet of warehouse space in Los Angeles, Northern California and the Seattle markets.
In the past five years, CenterPoint has invested more than $2 billion in the West Region, and we currently have a number of development projects in progress in California. We just recently completed a state-of-the-art warehouse at the Port of Oakland called CenterPoint Landing at Oakland Seaport. The West Region has been instrumental in CenterPoint’s success and strategic growth over the past decade.
JOC: When CenterPoint identifies new areas of investment, whether it’s an emerging sub-market or markets that you’re quite familiar with, what factors are you looking for?
Bob Andrews: What we’re looking for – not so much in emerging markets so much – are emerging changes within our specific targeted markets and in our infield markets. We’ve always been looking for what we call ‘logistically advantaged properties,’ and in the port markets, that really consists of trailer parking, dock-high doors and the ability to have high throughput from the ports.
When we look at assets in those three markets, we’re really looking for properties that we can either reposition by removing square footage, we can reclaim more yard and create more trailer parking and then certainly add docks but our strategy is fairly simple. We, for instance, in Tacoma, identified a need for trailer parking and trailer yards about four years ago.
We have assembled multiple properties now that we think really complement the port complex in Tacoma and have really been a benefit to that market. We also believe that getting standalone trailer yards also complement our existing footprint, some of our existing traditional buildings. So we always like to have some connectivity to the investments that we are making in certain markets.
JOC: How has overall market interest changed in the last two years? Are you seeing your users changing? What micro trends are you seeing within user interest?
Bob Andrews: I would say the biggest change we’ve seen in the last two years is a flight to quality, and again flight to quality is a Class A product. Class A product is generally limited in your infield markets and it’s in the outlying markets. For instance, in Southern California, it’d be in Inland Empire West, Inland Empire East, and when you go to Oakland, it’s the Central Valley, Tracy, Lathrop and Manteca, all the way out to Stockton and Sacramento.
Then when you go up to the Seattle market, south of Kent Valley and south of Tacoma, the markets of Lacey, Dupont and Frederickson are getting that Class A product where you see larger requirements going to the flight to quality in which you get the finer features that you just don’t find in the infield. So overall, that market interest has dictated those kinds of products being built.
We’re seeing a lot of retail users. That’s part of their supply chain and moving product more onto the e-commerce platforms. You’re just seeing those buildings that were two and three and 400,000-square-foot buildings now going between 500 and a million square feet. As you see more product ship to warehouses from bricks and mortar retail, that’s what you’re seeing in these outgoing markets. That’s really the only place you can find the land to build such facilities.
JOC: For those not familiar with the term in the context of real estate, what do the flight to quality markers look like at the moment?
Bob Andrews: Yeah. Flight to quality is where modern warehouses have amenities that are necessary for high throughput e-commerce. That consists of a lot of truck doors – a higher ratio of truck doors – and higher clear heights. Clear heights of 30 foot clear to 36 foot clear just two to five years ago are now 40 foot clear. The new standard at a certain size range and buildings are being built to 50 foot clear now on a spec basis across the country. You’ll continue to see the modern warehouse be refined to support that e-commerce business, high efficiency and high throughput.
JOC: This transition has sped up, I’m sure. As with so much evolution of everything over the last two years, what’s your take on how this has played out and what’s ahead?
Bob Andrews: I think in the last two years there’s been a huge change and I think that everyone is trying to build the next best product for the next cycle or next year – I’m not sure anyone knows exactly what it’s going to be – but it’s definitely going be in line towards whatever technologies are going to be integrated into the supply chain, whether it’s automated trucks, automated forklifts, automated yard mules, and robotics inside the building.
All that will be incorporated into the next generation and you’re starting to see it now with technology, but the biggest change will be whatever technology’s adopted and integrated into the supply chain will have to come into the warehouses and so we can build the best boxes and the most efficient boxes, but it will be integrated with some sort of technology in the future.
JOC: How do you future-proof when you’re building? When it comes to the tech needed, are you watching certain developments, making predictions on what will be adopted? How do you build to the demand of the future?
Bob Andrews: Yeah, we’re building state-of-the-art buildings that we think reflect the current demand and hopefully have specifications that are built in to accommodate the future technology, but I think until it’s adopted, and it’s really clearly understood, you’re building spec product, and you’re building to the demand of today.
JOC: You have a 20-year history in the West Coast market. What are your thoughts on what we’re seeing there with port volumes and the low vacancy rate? What are your predictions on how that’s going to impact pricing?
Bob Andrews: In Southern California, you see record vacancy rates. They’ve never been this low, and there’s no sign that that’s going to change in the near future. Right now, it’s sub-one percent in all product types. We just don’t have the land.
[The industry doesn’t] have a pipeline of development that’s going to make that move, and there are different sorts of formulas on how much more million square feet you’re going to need for so much percentage increase in e-commerce sales. Still, it’s a tremendous amount of square footage. It just cannot be accommodated in the current infield market.
So, again, you’ll continue to see any available land that you can develop on, which will be further out from the infield markets, going to have high demand from investors and from developers continually, and we’ll continue to see more of that product built to try to keep up with the demand. But right now, when you look at the map, there’s just no way [the industry] can keep up with it, including the markets of East Bay, Oakland, up to the Central Valley and then also into the Seattle market that is really land constrained.
A lot of barriers to entry for development exist. And you’re also pushed up against – which creates more pressure on the vacancy rate – the fact that we have so many regulations. We have so much pressure on costs for construction and labor. So just like you’re seeing the supply chain being disrupted during the last 18 months with COVID, you’ve seen that constraint in developing and getting product to market.
And then there’s a whole other layer of governmental approvals in certain markets. It just delays, delays, delays, and adds costs. So the vacancy rates are probably not going to move. Demand will definitely increase more than supply, and ultimately, the pressure will be on pricing.
You’ll see higher prices because of higher costs, and, in the last six months, we’ve seen the largest increase in warehouse rents in the Southern California market that we’ve ever seen in the history of this market, and that’s probably not ending in the near year to one to two years. We probably won’t see much of a change. If anything, prices will continue to creep up.
JOC: What about interest in renovations and repurposing? When there’s no space to build out, what about building up or overhauling tech within an existing space to modernize and do more with that existing footprint? What interest are you seeing in that?
Bob Andrews: Well, you’ll see the actual users, the tenants, trying to figure out how to use their space as efficiently as possible. So that’s always a challenge for tenants, but what you’ll see – and it happens all the time – where in the last five to 10 years as infield, [industrial space has] become more important to users that need to be close to ports.
Developers and investors have been buying sites and just repurposing them. At CenterPoint, that’s been a mainstay of our focus where we take buildings and convert them into better logistic facilities, but we want to be near the port. So with that, everyone else is doing the same thing. I mean, a question that always gets batted around is, ‘will Los Angeles see multi-story?’, and yeah, some are being planned.
I think the land price has to get to a certain point where it makes sense to do that, and right now, not only have rental rates gone up, but land prices have just accelerated to historic highs. So maybe there’s a point here where it does make sense to have multi-story. Still, you will see the conversion of older sites and with the new sites we’ve built, even with high rents, there are tenants that have to be near the ports, so they don’t have the option of going to another market or going to another port of entry. So that’s what you’re going to see.
JOC: You mentioned Seattle, and I want to turn our conversation for a moment to CenterPoint investments there, and in Oakland as well. Can you tell us a bit about that piece of the company’s investment strategy?
Bob Andrews: We’ve been a big investor in both the Seattle and Oakland markets, for the same fact that we’re a big investor in Southern California. We see two things in both of those markets. Again, there’s a barrier to entry for new development.
We always know that when you get into those markets that you have pricing power where you know that rents are going to, over the long term, increase. So, we believe if we get the right product in those markets and build in the kind of logistic features that we think are valuable to that tenant demand, we’re always going to have valuable assets that we can move rent.
We like the Kent Valley. We like South Seattle. And we love Tacoma. Tacoma has been experiencing a huge increase in port traffic. Some of that has been diverted from Long Beach and Los Angeles, and a lot of that stuff will end up being permanent cargo loads through those two ports. We’re very bullish on Seattle, and the same with Oakland.
Again, with limited land and limited industrial in the infield, it’s going to be difficult to continue to develop in some of those cities. So, we like to buy existing product. We like to refurbish it and repurpose it for logistical uses. With our new spec building in the Port of Oakland – a more than 400,000-square-foot building – we’ve just finished construction there, and we’re seeing a tremendous amount of interest from companies looking to take advantage of on-dock warehousing.
We’re very confident in that building and the rest of the footprint we have from Richmond down to Hayward and out to the Manteca market. So again, a lot of demand, and we feel like pricing will continue to grow there and as long as you have the right product in those markets.
JOC: To close, we are certainly in the middle of a disruptive moment, but the dust is settling on a new normal, so to speak. Industrial real estate has definitely benefited from the disruption and significant e-commerce shifts. What do you see ahead?
Bob Andrews: I don’t know if we’ll ever get back to a traditional market. I think the market has changed and really been impacted, and when you look at the demand and the kind of users we have, everyone talks about buffer stock or safety stock or onshoring, all that’s going to take place, and it’s already being built in the supply chain.
You have two factors that I don’t think will ever get us back to a traditional market, and those two factors are the increase in e-commerce – which we all know about, and that requirement for more industrial space – and then on top of that, you have companies that want to make sure they don’t have shortages and they do have that buffer or safety stock.
It all bodes well for more industrial real estate to be leased. I think the main thing you’re going to find is, it’s going to be technology that is going to bring the biggest changes in our traditional markets and that technology is probably an answer to labor. It’s an answer to efficiencies. It’s an answer to cost, but I just don’t see us going back to a traditional market.
The other part of the story is the institutional sponsorship of the whole industrial market that continues to have capital inflows. Those capital inflows will create bigger ownerships and bigger efficiencies, and so you’ll just see [industrial] continue to be a very sought-after investment class with more capital going in. Ultimately, I think it will continue to grow as we can find land to grow the footprint, but demand will continue to outpace supply well into the next couple of years.