Electrical Supply Chain Issues Sapping Speedy Industrial Deliveries
While the industrial asset class has been a perennial bright spot in the Chicago real estate market for several years now, electrical supply chain issues are zapping developers' ability to complete fully operational projects in a timely fashion.
Over the past few years, the cost of steel and labor were major pain points. Those expenses seem to have stabilized, but at Bisnow’s Chicago Industrial Summit, panelists agreed that issues sourcing electrical switchgear are now the most pronounced supply chain disruption, forcing some to turn to external generators to get projects up and running.
“[It’s] the biggest lead time I have in construction — everything's back to normal — except for electrical switchgear,” said Peak Construction Vice President David Michael at the event held last week at The Kimpton Gray Hotel.
“It’s out a year," Michael said. "And that's a challenge. We've got a few buildings that are done now that we're going to power on generators for a month or two until the switchgear gets in.”
One type of higher voltage equipment is averaging a lead time of 60 to 70 weeks, while other key utility infrastructure lead times remain 20% to 40% higher, according to a Q3 electrical supply chain outlook from supply purchasing platform Raiven. Raiven noted the ongoing strain of utility and infrastructure projects nationally has added up to a 12 to 18-month wait for critical gear, including transformers and high-voltage switchgear.
WBS Equities CEO and founder Wendy Berger said her company is building a bacon manufacturing facility in Iowa, and the electrical supply chain issue is so aggravated, the firm is planning to use external generators to power the plant for at least a year and potentially longer.
“Maybe when we're producing in full capacity, maybe we'll have full power. But we have to plan for plan B,” Berger said.
The long lead times are largely due to the scale of utility-based infrastructure projects that are underway and accelerating under initiatives associated with the Biden administration's Inflation Reduction Act, per the Raiven report. These demand-driven programs have supplanted pandemic-related supply chain issues as the leading cause for a supply slowdown on key materials, the report said.
The outlook predicts that demand and associated lead times are unlikely to let up for the remainder of the year and possibly beyond, adding that “neither pricing nor availability metrics will ease in the short to near-term.”
While new supply chain issues have popped up, others have abated, alleviating some of the heightened costs prevalent during the pandemic.
The high price of labor used to be a constant discussion point in project planning, but those woes are subsiding. Berger pointed to a current construction project in Florida where WBS is experiencing “zero” labor issues.
“We're feeling it this year less for the first time,” Berger said. “It's like coming out of a three-year fog on every conversation, starting with labor issues.”
Looking toward the future of energy needs, panelists said there is value in reinforcing the roofs of spec buildings with steel to support potential solar panel installations. When the cost of steel was higher, that was a more difficult decision, but now that the price is cheaper, it makes more sense to implement, Michael said.
“The solar on the roof is on every project,” Michael said. “Today it's almost a no-brainer. If I was doing it a year and a half ago, I would have thought about it. Steel was really up there at its peak. But now… a 25 to 50 cent premium to be set up for the future is a no-brainer.”
With some supply chain issues lingering, industrial indicators show additional hiccups on the horizon, including a slowing of the region's formerly breakneck leasing velocity.
Quarterly leasing activity dropped to 4.7M SF in the third quarter, less than half of Q2's 9.9M SF. The last time leasing activity was below 5M SF was in Q1 2017 when tenants leased 2.8M SF, JLL Director of Industrial Research George Cutro told Bisnow in an email.
No new leases were signed in the big-box segment of the market in Q3, according to JLL, a reversal from the early pandemic days when such spaces were eagerly gobbled up amid an e-commerce boom. Big-box industrial spaces typically run upward of 200K SF and are used for large warehouses or distribution centers.
The city’s vacancy rate in Q3 was 3.8%, up 75 basis points from the Q2 rate of 3.05%. One year ago, Chicago’s industrial vacancy rate was 2.84%. Cutro attributed the rise to the volume of new space delivered to the market rather than companies giving up space.
“If you go back to 2021, we were the recipients of an unprecedented demand, and in so many markets, we were pre-leasing buildings at a pace that I had just never seen before, and I think we got a little bit spoiled,” Becknell Industrial Senior Vice President of Leasing Matt Neumann said at the event. “I still believe that the tenant demand is stable, but it is a noticeable change in pace.”
