Landmark Links March 12th – A Song of Ice on Fire?

iron throne

Lead Storey: The growth of online grocery delivery coupled with grocers moving towards high tech cold storage distribution systems could be pointing to cold storage, which currently has only 180MM sf of inventory in the entire US, being the next hot new property segment for industrial investors.

If you take a step back, this makes a lot of sense.  Consumers mostly love grocery delivery, yet grocers view it as a necessary evil as they haven’t yet figured out a way to make it profitable.  Part of this profitability problem likely lies in the inefficiency of using facilities built for brick and mortar retail as delivery distribution centers.  Take Instacart, for example (full disclosure, I am an Instacart customer and consider it a godsend for working parents).  The front end of the Instacart product is excellent.  A member goes online, selects which store they want to shop at and fill their cart with groceries that they choose.  Once that shopper confirms their order and checks out, the it gets routed to an Instacart shopper.  This is where the process goes off the rails from an efficiency standpoint, IMO.  The shopper goes to the center where the store is located and has to park in an often-busy retail parking lot.  They then enter the store, select the items that the customer has ordered and wait in line to pay with other shoppers before getting back into their vehicle and delivering the groceries.

This process is time consuming but also expensive.  The items that the Instacart shopper purchased are stored in a retail location with expensive rents that is not designed for efficiency but rather for marketing – trying to entice in-person shoppers (as opposed to those using a delivery service) to spend as much money on high margin goods.  That’s fine for an in-store experience but delivery customers couldn’t care less since they aren’t in the store anyway.  Just imagine if Amazon and other online retailers operated this way – sending their delivery people to stores to shop for goods rather than routing orders through their sophisticated fulfillment network of big box and last mile facilities.  It would be an unprofitable and inefficient mess – which is basically what grocery delivery is today.

Much of today’s existing cold storage space functions as distribution facilities for grocers and restaurants.  I suspect that we are going to begin to see a shifting market where the system of cold storage warehouse facilities begins to look a lot more like that of traditional warehouse space with large distribution centers and smaller last mile centers.  Those last mile facilities will effectively be grocery stores but set up to optimize efficiency and minimize cost – in other words laid out like an actual warehouse rather than a retail store with the associated lower rents and no consumer and marketing frills.  If I’m correct here, the Instacart shopper of the future will not even shop at the same grocery store as a direct customer.  They will instead go to that grocer’s last mile warehouse distribution facility to pick up orders that are assembled in-house once they are received electronically in facility that is designed specifically for that purpose.

I write this with the caveat that cold storage is far more expensive to build and operate than traditional warehouse and distribution facilities are so the investments will be more substantial upfront.  However, consumer trends indicate that it is highly likely that the trend towards grocery delivery will continue and that really can’t happen profitably without a large amount of growth in the cold storage space.

It’s no secret how much eCommerce has transformed industrial real estate in the last decade or so and that was a massive and mature market totaling billions of square feet.  Now, consider that the entire cold storage market in the United States currently consists of only 180 million square feet of inventory and it’s not hard to see how this could be a powerful trend if grocery delivery really is the wave of the future.  The calendar says that spring is nearly here but winter may be coming after all.

Economy

Hold Your Nose: The February nonfarm payroll report was a stinker with 20k jobs being created as opposed to projections of 178k.  However, the previous two months were revised higher.  Silver linings included  the decline in the employment rate (which should be expected after a government shutdown), increase in wages, and decline in people working part time for economic reasons.

It Was the Best of Times: Despite a lot of hand-wringing from some people residing in developed countries, the world really is getting richer as poor countries catch up.

Commercial

Different Story: As the previous economic cycle matured, office and retail were the hot commercial real estate sectors.  Late in the current cycle, its industrial and multi-family.

Rebound? REIT valuations have caught up with private real estate in the past few months, leading some to project an uptick in IPOs for 2019.

Residential

Power Shift: A new report from Zillow found that buyers are gaining negotiating leverage in some of the most high-priced housing markets.  See Also: Mortgage rates have continued their downward momentum in early march.

Coming Wave: A handful of massive IPOs of companies based in San Francisco will result in thousands of overnight millionaires with tons of cash to buy homes in an already-tight and astronomically expensive market.  As a result some sellers are holding homes off of the market waiting for the deluge of cash.

Proceed with Caution: Builders are pre-selling an increasingly higher percentage of homes, showing little appetite for building on spec and little confidence that demand will stay strong if interest rates go back up.

Profiles

Dual Meaning: This Wall Street Journal story about how pharma bro Martin Shkreli is running his former company via a contraband cell phone from behind bars includes the nugget that Shkreli goes by the nickname ‘Asshole’, which could mean more than one thing in prison.

Washed Away: Less than 1% of California currently falls under any kind of drought status, the lowest level since 2011.  But See: Trillions of gallons of water from recent rains is flowing into the ocean because California’s storm and water storage infrastructure sucks.

All Eggs in One Basket: Amazon has abruptly stopped ordering from many of it’s suppliers, forcing them to partake in its marketplace instead and shoulder more risk.  Reminder: if you own a business with only one client, that client owns you.

Chart of the Day

Household net worth took a dive last quarter, mostly due to the stock market slump.  Will consumer spending follow?

Source: The Daily Shot

WTF

Irony: An animal rights group stormed a pig farm in order to raise awareness about animal cruelty and cuddle newborn pigs.  However, they ended up killing two piglets because vegans.  Now those two young lives are lost forever and will never become the bacon that they were born to be.  Vegans are monsters.

Identity Crisis: A hipster tried to sue a magazine for using his image in an article about how all hipsters look alike only to find out that he wasn’t the hipster in the picture.

Gotta Hear Both Sides: A woman shot her boyfriend for snoring too loudly because Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links March 12th – A Song of Ice on Fire?

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