History Repeats Itself

We have all heard the saying “history repeats itself”, but does it really? The world works in cycles. We see it most in the financial world, but it’s everywhere. Life has a funny way of coming back around, but never in the same exact way as before. The astute are able to recognize trends before they happen, even when the cycles come in different forms. This post is all about the recognition of a new cycle within the industrial sector of real estate and how the past can help us make better decisions in the coming years.

Our industrial inventory in Cleveland, OH, is dated and aging due to the manufacturing backbone that Cleveland was built on. Two and three story industrial facilities make little sense for the needs of modern users. Likewise, not many of those users even exist in the U.S. any more. The large-scale exportation of manufacturing jobs to places like China and India made many of our facilities obsolete. This is where the cycle began. The loss of jobs in the US during this time was a big fear for the country. Our businesses began to shift to service-based needs instead of manufacturing-based needs. Accelerated by the recession in 2008, our country lost jobs and lost them in thousands as companies moved to countries with less expensive labor. The decade between the recession in the late 2000s and current times was a transition period. For industrial real estate, this period was marked by developers purchasing property for cheap and attempting to redevelop it or offer low rental rates to get occupants in the space. This was not a bad strategy, but due to the economic downturn, the users of the space were significantly reduced, so many spaces sat vacant and falling apart.

The 2010s ushered in a new era of technology, and online shopping boomed. Manufacturing jobs were beginning to be replaced by distribution jobs. Large manufacturing facilities were not required, but warehouses were. Developers began building to satisfy the needs of their clients, this mostly entailed building 36-foot-clear multi-dock facilities to help companies transport goods more effectively. It is often said that the last mile of the distribution process is the most challenging and expensive portion. Many companies combated this by placing smaller facilities closer to their customer bases. This meant they could also fill many jobs that were lost as manufacturing left these communities. I identify this time as the beginning of the new cycle. Business began to recover; the country’s economy was strong, and consumer desires shifted as the online shopping brands grew.

Much like the great recession fueled job loss and a move away from manufacturing, the global pandemic fueled job creation and a move toward distribution space. COVID-19 accelerated the cycle. Thousands of local jobs were created as people stayed home and ordered from companies like Amazon. Third-party resellers stressed the resources of FedEx, UPS, and USPS as internet shopping increased significantly more than the country anticipated. This strain was felt on the industrial real estate market as vacancy rates reached a historic low in the Cleveland area. Companies were willing to fully lease buildings before developers had even put up walls. As demand grew and supply diminished, asking rates hit all-time highs.

It would be easy to look back now and see the lack of bulk distribution as an issue for Cleveland, but the truth is that before COVID-19, the lack of this space was not felt by the market. Now, however, we have multiple major spec distribution centers being built in all areas of northeast Ohio, most of which will be leased before these buildings are completed. This is good for the market because more space will be available for those companies that require it; however, as more bulk space becomes available, market velocity may begin to slow. Tenants who require the advantages of these large facilities will pay market rates for brand new high-end space. Smaller users who were pinched during COVID-19 may have an easier time finding flex and B-C space that meets their needs. The labor market grew as the economy grew. Jobs lost in 2008 were now being replaced in abundance in new distribution centers.

My question now is, when is it enough? What does the next cycle look like? We lost jobs in 2008 due to cheaper labor in other areas of the world. Is the rise of technology going to be the next thing that takes jobs away? According to a leaked Amazon memo, the company expects to run out of labor in many of its major metropolitan areas by 2024. I believe many distribution jobs within these facilities will slowly be replaced by machines that make the jobs of the employees in the physical building easier, but is that really going to take jobs away if large companies are already expecting labor issues in the coming years?

With the collapse and bailout of SVB and many other banks seemingly on the ropes, is this another 2008? It seems as if the cycle has come back around and rested where we began almost 15 years ago. We may have clues as to how the market might be impacted, but as I said earlier, every cycle is just a bit different. How and when the pieces will fall is still a question that is unknown. I take comfort in the fact that our world works in cycles because it allows us to be confident that perseverance through bad times will pay off.