Industrial Insights Podcast
Industrial Insights with Jesse Gundersheim
Episode summary
Okay, good morning, everybody. Welcome back to the Industrial Insights podcast. I have Jesse Gundersheim of CoStar with me, who's a repeat guest. And we always have a good time together going over the market. And so with the end of Q2 coming around and details and data, it's hard to come by.
Full transcript
Justin Smith 00:01
Okay, good morning, everybody. Welcome back to the Industrial Insights podcast. I have Jesse Gundersheim of CoStar with me, who's a repeat guest. And we always have a good time together going over the market. And so with the end of Q2 coming around and details and data, it's hard to come by. It's hard to track such a gigantic market on the daily. And we always have to speak with clients about it and be as up to speed as possible. So I thought it would be great to connect with Jesse and it'd be a great benefit for everybody to see where we are shaking out with the end of the quarter. And then that will just help set some expectations for the third quarter and for the second half of the year. So welcome, Jesse. Thank you for being here.
Jesse Gundersheim 00:47
Thanks so much for having me, Justin. Pleasure.
Justin Smith 00:50
And how long have you been at CoStar now?
Jesse Gundersheim 00:53
Coast are I think seven plus years. Working on eight, yeah.
Justin Smith 00:57
Okay. So you're an old man. People are like, who knows where everything is around here. Let's ask Jesse.
Jesse Gundersheim 01:05
You know, I'm getting there. There's certainly actually some analysts that have been with the company for twice my tenure, 20 years. I've worked with a couple of sales executives who have been here for a couple of decades as well. So yeah, I'm getting up there, but.
Justin Smith 01:17
Yes. Dusty. Dusty's got you beat, I would guess.
Jesse Gundersheim 01:22
Yeah, some of our researchers have been here even longer than that.
Justin Smith 01:26
That's awesome. Cool. Well, I had sent you a part of my Q1 presentation that I put out for the Inland Empire. And then it's so fun to check like the temperature of how are we doing and with the market like a deflating and then deflating is different than like recession or cratering or like something more like dramatic. And of course, we are all trying to string together multiple quarters of good news or of positive net absorption is the good news in our business. And we're all searching for like that sign of recovery and for confidence, especially like capital markets and confidence and capital wanting to be in industrial and capital having a hard time, even executives and tenants having a hard time knowing if I sign up for some big deal now. How good do I feel that it will be a good deal next year or in five years or when I need to exit it and know that I made the right decision? So we had some good news and then now it's a question mark again, perhaps I was hoping maybe you could give me and all of us, the audience, kind of just your general sentiment and kind of just high level overview of stuff we're gonna go over today.
Jesse Gundersheim 02:47
Yeah, yeah, sure. And just to touch on the beginning, how large our markets were, I thought it was interesting. saw recently Orange County was the seventh largest industrial market that we're tracking for analytics across the entire world, actually, with over $100 billion of asset value. If you combine LA, IE, and OC, it's $0.6 trillion of asset value. So yeah, tons of properties to look at and analyze. And so the fundamentals are still weakening. I think you hit the sentiment correctly in that, you know, maybe the rise in availability and vacancy weren't rising as steeply in first quarter as they were in 2024, 2023. But the second quarter numbers were pretty negative. Again, they're still preliminary at this point, but we do have negative absorption across all three Southern California markets, about three million square feet of lost occupancy. In the inland empire and equal 3 million square feet lost in LA and maybe about 600,000 in Orange County. So vacancy ticks up across all 3 markets availability. I believe also ticked up a little bit, or at least has been wavering not signs of any downturn yet.
Justin Smith 04:07
Yeah, which is all somewhat similar to the positive volumes of Q1 is what were negative, not like we're like back at square one or like erase the progress, but like similar proportions.
Jesse Gundersheim 04:21
Yeah, the move-ins and move-outs, the vacancy absorption, it can be a little bit volatile on a quarter-to-quarter basis, right? One large tenant could swing it one way or the other. I think the availability rate that we have, just the four lease listings on the market, tends to be a little bit more smooth in its trajectory and I think a little bit more forward-looking because we do include our under-construction supply in that and maybe some sublease space that's available but not yet vacated by the tenant.
Justin Smith 04:32
Yep, that's a good point.
Jesse Gundersheim 04:51
But those, yeah, basically saw some cresting in the inland empire, but then in 2Q it did pick up again, take up again. And then OC and IE continued to rise as well up to around 8 % for total availability in those markets.
Justin Smith 05:07
Yeah, can you help me understand a little bit more of how we track things? Like when I was looking at this leasing volume and it's like before the quarter, after the quarter, estimated more that might hit and then I generally think of like when a deal is signed versus when a tenant moves in and just like how the cake is baked a little bit. These are maybe my own personal questions, but it helps me understand the data a little better.
Jesse Gundersheim 05:15
Yeah. Yes. Yeah, questions that we get at CoStar quite frequently. So we are tracking different spaces for both its availability as well as its physical occupancy or vacancy. So it'll hit the platform for lease. That's an available space. If it gets leased, it's going to be off of the for lease listing, of course. That's going to be leasing activity. And so Yeah, there's a lot of it, but we collect leasing activity also after the quarter ends. Of course, we find out about leases that occurred, you know, in second quarter after the end of this month. So we've kind of got the collection in quarter total. What we expect to collect after that we're able to now cast. But what we see in the leasing activity, it's been actually really strong. That's a little bit counterintuitive from what I've heard from some brokers, you know, saying at least in In first quarter that there was some stalling of deals to the tariffs that didn't really coincide with the leasing volume at least. So there's tons of activity out there. Tenants are taking spaces. But that's only one side of the story. That's the demand picture, right? Or the leasing coming off the opposite side of that that we haven't talked about in our leasing activity yet is maybe the new listings, right? That's the counter of it. So. Availability rate is going to be based on the leasing versus listings. More new listings surpassed our leasing activity even though the leasing was high and that pushed the availability rate higher.
Justin Smith 07:14
Yeah, I assume vacancy, think you alluded to it is what you think of as being like the more accurate number, what like when it comes down to like available space might turn into a renewal and it's not actual vacancy, stuff like that, that might like, yeah.
Jesse Gundersheim 07:30
It's a lower number for sure, about 200 basis points. So around 6 % for LA and OC in terms of vacancy and around 8 % in the Inland Empire compared to 11 % availability rate. I think there's all different ways to skin a cat. If you're a tenant, maybe you're more interested in the available space because you could take any of that. If you're an existing landlord, maybe you want to focus on just the pure vacancy of properties that you're more competitive right now. And then there is the overlap of that as well. So we also have spaces that are vacant and available for lease. And that would be even a little bit lower than our pure vacancy rate.
Justin Smith 08:13
Yeah. And then just slicing and dicing like sizes of, have you noticed any different trends of like sizes that are softer or that are seeing more activity?
Jesse Gundersheim 08:27
Yeah, sure. I would preface that all sizes have weakened, and vacancy rising. certainly the larger size, I mean, sorry to be the bearer of bad news throughout this whole podcast, right? It's not great out there. But I'd say the small-bay buildings have hung on there better, to a better degree. Vacancy hasn't expanded as severely as it has for larger buildings.
Justin Smith 08:37
Oh no! Right? Yeah.
Jesse Gundersheim 08:53
Over 100,000 square feet and over 250 to 500,000 square feet was kind of the sore spot for inland SoCal. It was improving a little bit in recent quarters, but that's where the bulk of both supply growth was as well as occupancy loss.
Justin Smith 09:14
Yeah, it's interesting. We're running with a bunch of requirements that are like the one to 200 that are in the Inland Empire. Some are only Inland Empire West, some are East. And then just seeing like what our experience is. Some we've already landed, some we're still in the market for. And some of the ones we're still in the market where like it's taken a while to find the right fit and find the right deal. Like we have seen the erosion just if you think of like someone you talked with last year versus three or six months ago versus like a Q1 versus now, and just like what has the tenor changed to or what has like the actual like a deal economics, like how much of it changed in face rate in leasing concessions and TI concessions. I feel like it definitely like the base rate. You can feel the erosion in the East. In the West, you definitely get like half erosion and half like. We're strong, like we're not worried or we have a good product or like it's not that weak. And, yeah, I feel like, this idea of people saying, this is the best I will offer, like take it or leave it. I feel like there's a lot more tenants with the take it or leave it attitude, which is, interesting to have tenants be like, you know what? Like, I'm smart enough. I've been educated enough for like, and I have my own like, feelings on my business and like what I'm seeing in the economy. And this is like a fair, like economic terms for a deal. And if you don't like it, like I'll find someone who does. And it's been a while since we've had tenants like trying to dictate terms a little bit. So it's one of those that like, takes a moment to be like, okay, we're in like that part of like a tenant leverage in that size range and in that market where like a tenants have enough confidence or enough like just like. like they feel like they have to do that, like just in order to make sure like they get a deal that they can honor and know that they can fulfill. So it's been interesting this past quarter and getting a lot of like a tenant saying take it or leave it and then seeing like, okay, let's take it. And take it means more deals that are cheaper or more deals with concessions or more deals that would tell you like that the next quarter's rates will be lower.
Jesse Gundersheim 11:39
Right, right. Well, there's there's certainly I think more options for tenants. I think I've seen some of the rates drop for the new product that's been existing out there, right? It's come down from say two bucks to maybe 165 are seeing some reductions in in asking rents on the platform. Small Bay is certainly stronger, but when I talked to most of the large operators of say Small Bay buildings in inner SoCal, they say they're not necessarily pushing rents as compared to a year ago. Pretty flat, know, tenants do have options out there and they don't want to push their tenants out or not attract them. And so they're not necessarily lowering rates, but not really pushing them aggressively. Certainly not.
Justin Smith 12:29
Be thankful for what you have. Yeah, little gratitude. You don't see that. That's not a metric we track. How gracious are the landlords for their tenants? But for now, it's like, if you got a good one, you should do what you can to keep them and keep them in the project.
Jesse Gundersheim 12:48
Yeah, yeah. There's still lots of tenants out there, but I think you, yeah, they're out there searching, they have options, and they probably sense that the conditions aren't necessarily gonna get tighter, at least through the end of this year, right? I think some of that urgency is probably off the table if they're educated on the market.
Justin Smith 13:08
Yeah, I've been toying with an idea I wanted to run by you and one was a data point I'd seen in a investors deck that was thinking like contemplating that Southern California, like it was like a leading market. And in this sense was like leading the market down or was like one of the first ones to start going down and like to continue going down. And the general idea was like, Will it be leading the stabilization or like leading the recovery or like how much does Southern California see the demand as it increases? And then I was looking at one of the awesome research slides you guys had that was talking about logistics absorption and population growth and like the correlation. And then you have like LA population growth negative modestly, but still like Orange County. Inland Empire like always is like a growing market to a degree and then you have like all the markets that you think of that like you see and hear about that are like the growing population markets of like where people are moving whether it's like Tennessee or Texas or Florida or the Carolinas and even Arizona still or maybe not and so it was interesting to think of like how much if SoCal led the decline will it lead the comeback and like That's really hard to hold all of that in your head and then think through how much does population growth, how much of the pie does it correlate to? And is it just 10 % or is it like 80 %?
Jesse Gundersheim 14:53
Right, right. Somewhere in between, I would venture to say. But certainly, a high percentage, decent amount of the supply, even in SoCal, is dedicated towards our huge population, right? And just servicing that, whether it be an operating business that provides a service to houses and just needs to reach a lot of households and people, or kind of last mile distribution, but not necessarily logistics base of warehousing goods that are going to another location across the country. But yeah, that chart is, you know, I think explanatory of some of the strife that we've had in terms of occupancy loss in SoCal, right? One of the few areas on the chart to see population loss in the post-pandemic era. One good note released by the census a couple of weeks ago is that LA population growth actually turned positive again, as did Orange County. in 2024. So, you know, maybe on the comeback story, I didn't share with you. also have a same type of a chart that's looking at the forecast. So from Oxford economics, what that five year forecast for population would look like as well as our forecast for logistics demand. And so LA and Orange County, at least they turned back into the positive side of things, although they're not going to be. one of the leading markets. It's just so built out here. And if we're not building housing and apartments to the degree that you can, and across the South or in Texas, then we're not going to be able to get the population growth.
Justin Smith 16:33
There wasn't even room for Austin and Phoenix on the chart. I love that. That's awesome. It's just over there. We can't even handle that. Yeah.
Jesse Gundersheim 16:37
They were... Yeah, they screwed up the scale so much that all the dots just clustered together because their logistics demand growth was really off the charts, even more so than the population growth.
Justin Smith 16:53
Yeah, it's so hard to know how much that loop like is correlated to the real estate cycle. I own some properties in Austin and and then you hear about Phoenix and like even if the population growth is still going up, like how much was built and what's the supply look like and like how oversupplied are they and how like how to whack or like or not are they for the the cycle versus the population growth. yeah, it's like the growth is the fuel in the engine, but it doesn't necessarily tell you like the quality of the engine or like what the engine's able to do.
Jesse Gundersheim 17:25
Yeah. Absolutely. One of the things I'd like to do, I should do this quickly and share it with you, is looking at the total population at least in each market and comparing that to the logistics inventory. Maybe ascertain at least a quick glance into what percent might be fueled by the local population versus just kind of pure logistics.
Justin Smith 17:47
So do I. Yeah, and I saw the retail sales growth projections, right? That's always a good one that you wonder like retail sales, e-commerce sales, are they the same, are they different, or how like, when do those merge into one metric? And then advanced sales versus just regular sales of like, which one is more accurate or more like a leading a real time. And then The question I got to ask you, Jesse, this is the stump question. I don't have an answer to it. So I'm curious. Your opinion is, people track the ports containers coming in, what it costs to ship a container. And then you would love to think that containers coming in through the ports means positive absorption because those containers turn into shipments that go to trailers that go to buildings that fill up our racking and fill up buildings. But then you have like intermodal and you have.
Jesse Gundersheim 18:25
you
Justin Smith 18:50
containers that just go straight to Chicago or straight to Dallas or that never even reach our market. So like how much of port activity can you attribute to Southern California industrial? 68%, I don't know, that's today's guess. If I were guessing, that's really hard to know. And I feel like people look at ports so much, but you've had like a strong port activity and then like,
Jesse Gundersheim 19:04
Yeah, yeah. You
Justin Smith 19:18
tepid industrial absorption. And so when those don't jive enough quarters in a row, it's hard to know like how much you do weight it.
Jesse Gundersheim 19:25
Yeah, yeah, I mean, in good puts and even the opposite way, right? In the latest month, the imports cratered, but did we see people not leasing space or did the, to the occupancy levels? Yes, they dropped, but they wouldn't drop like on par with the import level. It's not a one-to-one thing, right?
Justin Smith 19:44
Or does it like lag one quarter or something like that where like port activity means the next quarter will be robust or like it's delayed a little bit perhaps.
Jesse Gundersheim 19:54
Right, it can be much more volatile. I think it's more of a longer term thing and maybe we want to look at actually total retail inventory levels, right? And so the imports could flow higher or lower at any time, but probably a more important metric is what's the total inventory on hand among US businesses, which has been relatively flat actually over the past couple of years. It soared. 2020, 2021, 2022, I believe, but not as much over the past couple of years despite getting positive US national absorption out of it. And so yeah, I mean, they are certainly critical for SoCal. They are correlated when I track trailing year absorption in LA versus the trailing year imports activity. I got a 71 % correlation rate when I ran it. about a year and a half ago before some of the dislocations, so a little bit less so now. But you would think that certainly there's some impact there. But I wanted to share, yeah, moreover, the retail sales forecast because that's what we really use for our forecast model. If we think that sales are gonna be lower, that'll probably mean that the inventory growth isn't there and we'll probably see less demand. And so the forecast,
Justin Smith 20:55
Okay.
Jesse Gundersheim 21:21
you know, impartial due to it. Maybe it would get a little bit better. It had that I showed you it was going to decline from nearly 4 % in 2024 to about 1.3 % this year. think Oxford, that's from Oxford economics, they're probably going to revise it a little bit higher based on the news I'm hearing this morning.
Justin Smith 21:23
Send the dumps. Yeah. They're pretty smart cookies though. They put out some of the best stuff. Yeah.
Jesse Gundersheim 21:44
I love it. And that was raised from it was lower when the tariffs on China were at 145%. Right. And so they'll probably improve a little bit and maybe they'll improve over time if inflation doesn't pick up, which it hasn't yet, but there are signs it could. And so still a lot of trepidation out there, but yeah, really it's all about kind of the health of consumer. If we're going to really see inflation or not, and if people are going to buy. fewer goods or not. That's to be seen.
Justin Smith 22:17
feel like all you can get out of it is directional, right, for a quarter or two. Because if you look backwards, like, of course, it doesn't have the huge dip. You've never seen a huge dip or a huge spike in any forecast, right? You just see like, predicting it to go up or go down by a smidge. And I feel like that's generally what you can get out of it is just directionally like, are there enough indicators? like that would give you confidence to predict future growth and what they're saying is not yet. Yeah. And maybe, and maybe not soon. Yeah.
Jesse Gundersheim 22:54
Yeah, yeah. I think we probably expected it to be a little bit worse than it has been. And probably most people did, probably most economic forecasters did, at least to this time. Not always on things.
Justin Smith 23:14
Totally. No sweat. feel like those are always good ones to think through of like a freight rates, the ports, sales, and all things that can like guide you to know how to advise people on making decisions, knowing they got to live with their decisions. But it's interesting with the landlords, a deal they do today will affect their value immediately and will have a long-term impact on the value of their assets. And then for tenants like kind of if you have a lease coming due, you've got to deal with it, right? Like that's why people always ask me like, is business good or bad based on the economy? And it's like, our business is good or bad, oftentimes based on how many leases are rolling in that quarter or in that year. And just like people have to make decisions and just as a renewal and it's like not an expansion or it's not a contraction. And so like the transaction version, like a part of our business is It dictates how much are new deals versus like a renewal deals, but perhaps not necessarily like, is there work to work on or is there not? It's just kind of like, what kind of work and what direction is that word?
Jesse Gundersheim 24:27
Yeah, well, we've seen a lot of movement, at least. I think we've seen an accelerated pace of both move-ins and move-outs. of that, know, leasing activity is up, but at the same time, the new listings are up. So lots of movement, maybe tenants signed shorter term leases, you know, not knowing what was going to happen. And we're just about five years post COVID right now, which I think is an interesting point, right? So five years ago, you would assign like three months into the whole COVID phenomenon. So it's just interesting to see how now these, maybe some of these post-COVID lease deals are gonna change dynamics as they expire.
Justin Smith 25:05
Yeah, for me that turns into NOI for landlords went super high, stayed high and like baked in increases for the life of leases. And now some of those mega high lease rates like should make a NOI maybe not like erode, but like maybe go from continuing to go up in a decreasing market to like closer to like a baseline for a period of time.
Jesse Gundersheim 25:31
Mm-hmm. And you were talking about our SoCal markets perhaps leading or influencing the national picture. And I shared our average rents with you. It was really interesting to see. Yes, certainly we're a leader in terms of the national picture. The rents have spiked to a greater degree and earlier here than they did nationally. And then nationally has been essentially a tapering of rent growth recently, whereas SoCal has been declining for some time now. And those rents and those lines did begin to flatten out more recently. They're not dropping like they were a year or a year and a half ago. It'll be interesting to see if that holds. I'm not super confident that that's going to hold, but there at least has been some stabilization in asking rents on CoStar as those.
Justin Smith 26:01
Yeah. When they're there, when people advertise them. Yeah. It seems like it could be as much as a year of like how much the peaks were off and going up and then in like rates going down. So Cal versus the nation. So yeah, that is interesting. I would assume a lot of it is just like the size of the population, right? That's got to be what dictates a lot of that.
Jesse Gundersheim 26:29
Yeah. Yeah, I was also just thinking.
Justin Smith 26:54
Just like a big building will skew all the numbers for absorption.
Jesse Gundersheim 27:00
Yeah, absolutely. It's probably a sizable, like a fifth size of the entire industrial market or so in the US.
Justin Smith 27:09
Yeah. What can you tell me about subleases? Sibleasing. Where are we at? Cause that's, that's part of like people making changes and like a transition and transactions and usually a good sign to track.
Jesse Gundersheim 27:14
Subly seeing... Yeah, I think I believe it took down a little bit in IE and LA has been a little bit volatile. So I think we're overall we're kind of bouncing around a similar level. So at least it's not rising like it was in 2024 still, but more of a flatlining still a sizable amount of the total available space out there, you know, maybe 15 to 20 % depending on the market. It could be as high as that. So that's part of what's providing leverage for tenants as well and dictating the rents lower. We do include our sub lease rates in our overall rent average.
Justin Smith 28:01
Yeah, it's still prevalent out there. Moving a sublease right now means you probably signed a deal that is more expensive than the sublease is worth right now. And so for someone to sublease their space, they have to subsidize it, or they have to take a hit, or I could take a write-off. I feel like that's an interesting dynamic. And there's people that don't need their space, but subleasing isn't necessarily like, it's not a profitable thing. It's just like, Like you'll take a lump to get out, but that's still better than like holding onto space, floating space you don't need.
Jesse Gundersheim 28:37
Totally, totally. Sometimes we'll see a rent that seems too low and then, it's a sublease deal and it's maybe even within a year's term or like a year and a half. And so, yeah, they don't need it, but they're willing to let go of it for almost anything. If anyone's there for it, they'll, you know, happy to recoup at least some other costs that they're not using.
Justin Smith 29:00
Yeah, how about new construction? There is some out there somewhere. And there are a few huge projects still like if you think in like Ontario, there's still like millions of square feet that are coming out of the ground that makes some people scratch their heads. But then like long term players are like, like confident in an acceptable amount of time, they'll absorb the space. But the graph sure takes you back to like 2009 levels of construction in the pipeline. So, yeah.
Jesse Gundersheim 29:37
Yeah, yeah, the active construction certainly it's down. I'd say more starts and still an inner SoCal versus IE over the past year. But it's down, what was it down? Maybe 75%, I think overall from the total peak of construction. There's still plenty of approvals and developers that could move forward on up to a million square foot warehouses if the demand is there for it. But.
Justin Smith 30:06
One phone call away.
Jesse Gundersheim 30:07
Whether they're just waiting there. Yeah, I heard I heard there's been a little bit of a hiccup with that maybe last quarter with the tariffs, but maybe that's over now. But still kind of kicking tires and and I haven't seen, you know, construction starts for, a million square foot warehouse recently. Even though there's potential to build it out, there's there's a lot of potential with really already approved stuff. which could provide runway for the next kind of three to five years. But then at the same time, on the other hand, you do have kind of the cities and the population moving against the, you know, the ease of building industrial further in the Atlanta Empire specifically. And so kind of 10 years down the line, it seems like supply growth will be more constrained.
Justin Smith 31:01
Yes, Prologis is betting on it and they seem like they're right. like they know it'll be good to be holding a lot of inventory in this market as time goes by, like it will only be more valuable to that, like on the macro.
Jesse Gundersheim 31:18
Yeah, you have to be a believer, I think, in the overall macro economy and the US consumer and retail sales overall. And if you could see that rising over time in the long term, then sure, you want to be holders of industrial space. And SoCal is probably a good place to do it.
Justin Smith 31:36
Yeah, we didn't touch on sales. Do you have any sales information that you think is a pertinent? I know for us, owner user sales was something that like the last 12 months there was more of with the idea that like Wall Street's out temporarily while they're out. If you can swing it like that now is the time and interest rates and SBA loans. are available. Interest rates was like 6.4, 6.5 for owner users of what they were getting from their banks. And then pricing on like the 50s and like what you think of like smaller Bay buildings that like is a typical like owner user purchase size plus or minus is. Pricing was going down just a little bit. So you're hitting like the new low number that didn't feel low. It just felt like the lowest you had seen in the past two years. That was like 300 bucks a foot, depending on where you were. And it's interesting to think of like, how much does that continue versus the sales that are like institutional in nature and like the total capital flows going in. I take those as like two good ones to balance. And it seems like Blackstone's been selling portfolios of projects that are like small bay and multi-tenant and there's been a couple like high profile larger institutional sales. So I was curious how that all fits into the like a general theme of capital flows.
Jesse Gundersheim 33:07
Yeah, I think there's still interest out there. I think there's still like dry capital among institutional investors who have, sold out a bit, probably still a bit on the sidelines looking to get in, you know. So I think the owner user, yeah, definitely had more opportunity to buy into larger buildings. But I do think institutional players are probably coming back now.
Justin Smith 33:19
Psypowder.
Jesse Gundersheim 33:36
Cap rates, you know, five and a half, maybe 6%, but I don't think they've really pressured higher more recently. We've kind of been flat around that for some time now, so I think that might give investors a little bit more confidence as well. Rents are flat now, but I think tenants are always conscious with kind of long-term historic rent growth in the market, so if they find good business reasons to buy an asset, if they know they're gonna be operating in it. for some time still makes, I think, sense for them business-wise.
Justin Smith 34:11
For your house, it's five years. That's the number when you're like, if you're gonna live there for five years, like you're probably gonna feel pretty good about it. I gotta imagine it's not too different here.
Jesse Gundersheim 34:22
Yeah, yeah, for long-term business, mean, there's tax benefits. You could maybe do depreciation. So, certainly benefits to being an owner, locking in your building, perhaps selling it for a higher price down the line even and being a real estate investor. You'll see some of these smaller companies make huge money over, say, a 10-year hold or 20-year hold, perhaps even more than their business made.
Justin Smith 34:36
Control.
Jesse Gundersheim 34:51
in that time making millions of dollars just on the real estate alone. So not a bad idea for long term.
Justin Smith 34:57
I would say all brokers have hundreds of stories of people that are like, I made more on the building than I did on the business. And like, that's really what gave me like the final wealth creation opportunity. For sure. What did I miss? Jesse, that's the high level stuff. I feel like that gets us generally up to date and helps people understand what's going on. Anything else?
Jesse Gundersheim 35:24
Hmm.
Justin Smith 35:25
on your mind that you think we didn't cover.
Jesse Gundersheim 35:27
Well, this is happening. I was just thinking about the national trends. It is kind of shaping up to be good sales volume-wise in that we are seeing stronger volume on a year-over-year basis. So think there's some improvement in terms of sales velocity. That's about what I could think of, yeah.
Justin Smith 35:50
The other one I thought was interesting that is, IE Las Vegas and Phoenix and comparing those ones, that one was like incomparable for the longest period of time. And then like it broke some of the remaining brain cells that I have left of like, wait a second, they're almost at parity, like in certain size segments. And I think 98. percent of business executives would still tell you housing is cheaper for my workforce, workforce is perhaps lower wage. But it's like so just like pure incentives and like after tax might be still lower to operate out of the state of California. But then I still had other executives be like the labor force out here is like it's trained, it's available, like I know it's there, I can count on it. It's not spotty. And like there's very skilled people that like I can be up and running and I can scale and like have confidence knowing that. So it is interesting thinking about like national companies that have a presence in SoCal that are trying to serve the general Southwest. And then like where is the best place to be for what kind of business and what size with how many people and to know like, wow, for a small blip of time, like you just on pure rent, like you may spend a very similar amount if you're in like a 200 and you got the IE to choose from and you're thinking of like how far should my trucks be going or like what's the cost to get product in and out of the area. So that was the only other one that like I don't usually track too often because we'll only have like a handful of deals in any given year but like usually they're good sized ones because people are making like a regional decision on a distribution center. So that's the only other one that is like a notable that's fun to share.
Jesse Gundersheim 37:41
Yeah, it's an interesting perspective. When I was working with brokerage firms, I don't know if we ever had a special sauce to say exactly, this is going to be the best location for you to service what you think is going to be your clientele base or your last distribution targets. So it's always a fascinating, I think, study to see. You're getting some of that.
Justin Smith 38:03
secret sauce, Jesse. Yeah, I'm on that quest. It is interesting to think of like all the variables. That's what really was hard to from a brokerage perspective to understand was like, how do you make assumptions on with your client and their data of like inbound cargo transportation expenses, what kind of transportation if it's like a full truckload or not, if you're utilizing three PLs or not, and to try and like add labor into the equation. and like have real estate labor and transportation and to be able to like layer those into a model or into a software and like make a decision off of it. And so I've been getting deeper and deeper into that with clients and on my own is just like a professional development. And it's not like it magically gives you like the perfect answer, right? Like, and you can screw it up and you can make bad assumptions. And so it's not perfect, but. Yeah, it's pretty cool to start to learn more of that. And just like if you are a CEO and you're making this decision, like who is helping you make it? How confident are you in your assumptions? And then you got to, you got to make the call and stroke the check.
Jesse Gundersheim 39:18
Yeah, yeah, I think it's interesting that the rents I think are pretty comparable in kind of the Las Vegas, Phoenix and IE now. So, and when I've heard the real estate in California is a little bit better in terms of quality, think it's got inherent, you know, things that are preferable, proximity to ports, proximity to more people locally, and access to get up to NorCal, as you've pointed out, over to Phoenix and back in a day or two.
Justin Smith 39:49
We need more cross-stocks, Jesse. I'd say that's the one thing that people don't value, builders don't build, cause like land is expensive, but yeah, that'd be that thing that like when you go to Phoenix and you're like, every 200 or 300 or 400 is a cross-stock. Not every, like it's a bit of an exaggeration, but like the vast majority are. And so like that's one area that like perhaps is superior or is like superior to degree you need that and that helps you.
Jesse Gundersheim 39:49
Hey. Yeah, yeah. And of course, yeah, the labor considerations are huge. There might be more labor out there, depending on perspective. Maybe it's hard to grow it there. And also the oil, right? Those two costs are so much more than the real estate is the transportation costs and the employee costs. And at least oil prices have been down recently over the past couple of years. so. That's been a benefactor, but you're doing like your risk reward, right? If you're going further inland from the ports, you're willing to pay the transportation costs for now and perhaps get to a cheaper labor supply pool. But then the risk is having those transportation costs rise, of course.
Justin Smith 41:00
The trade off, the eternal trade off. Super helpful, Jesse. I will leave you with the one hot take, which is when do we recover? When's the recovery? When have we recovered? If you're just putting a quarter on it as a Q1 2026, we're stable, we're happy, money's flowing, people are growing.
Jesse Gundersheim 41:02
you gosh... Yeah! I think. I like that target. That's probably what I would go for. We've certainly pushed it out a little bit further in time as we've come along here. Maybe vacancy we think will rise a little bit higher than we thought a year ago. But yeah, I think maybe by midpoint next year, we'll see kind of the downdraft of any potential tariff impacts play through. We've got kind of fiscal stimulus, perhaps lower taxes. So that could be a boost to the economy. Yeah.
Justin Smith 41:51
the optimist. I'll take your answers. Q2 2026. So maybe a more realistic. Yeah, everything always takes so slower than you would hope it to be.
Jesse Gundersheim 42:02
Yeah, yeah, we'll have less supply growth as well, of course, though. So that will help the dynamics if we can only squeeze some positive demand. That'll be helping things by the end of next year.
Justin Smith 42:14
help rents go up again, which is a good or bad, depending on who you're talking to. Yeah. Cool. Awesome. Jesse, thank you for being here. Thanks for taking the time to dive into it and share your opinion and your insights. We value it and I appreciate all your help.
Jesse Gundersheim 42:30
Thanks so much, Justin. My pleasure.
Justin Smith 42:32
All right, we'll catch you later. One year from now, we'll be talking now we'll have a recovery podcast.
Jesse Gundersheim 42:37
Let's do it.
Justin Smith 42:39
All right. See you later. Yep.