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Melinda McLaughlin is vice president, global head of research, for Prologis. In addition to leading the global research team, she focuses on tracking, analyzing and forecasting logistics real estate fundamentals and structural industry trends, and translating insights into strategic decision-making for the company. Her other areas of specialization include supply chain reconfiguration, location differentiation and econometric modeling.
Prior to joining Prologis in March 2015, Ms. McLaughlin was a vice president at Rosen Consulting Group, a boutique firm that provides economic, housing and commercial real estate strategic consulting services to a diverse roster of clients. Ms. McLaughlin holds a Bachelor of Science in economics from the Wharton School at the University of Pennsylvania with a concentration in real estate. She is a member of the Urban Land Institute.
David Maloney, Editorial Director, DC Velocity 00:01
What will warehouse real estate markets look like in 2023? New emission standards for heavy-duty trucks. And the Postal Service ups the ante on electric trucks.
Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, n this week's Logistics Matters podcast. He, I'm Dave Maloney. I'm the group editorial director at DC Velocity. Welcome.
Logistics Matters is sponsored by Aptean. Aptean is a global provider of mission-critical, industry-specific logistics and transportation management solutions. Aptean routing and scheduling delivers advanced transportation management systems to world leading brands, helping them streamline daily operational processes. If you're ready to see savings of up to 30% and unlock the value of your transportation operation, Aptean can help. Visit aptean.com and discover what's next, now.
As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be along to provide their insights into the top stories of this week. But to begin today: our warehouses were quite full this year, as companies had higher-than-desired inventory. What does the market hold for warehouse real estate in the coming year? To find out here's Ben with today's guest.
Ben.
Ben Ames, Senior News Editor, DC Velocity 01:27
Thanks, Dave. The logistics sector and the entire global supply chain around it, really, have been through some truly turbulent times lately, stretching across, of the course, the Covid crisis, war raging in Europe, rising inflation, much more. So, as we get ready to enter a new year, we're here today to discuss some business forecasts for 2023. These come from the logistics real estate firm Prologis, which holds investments worldwide, including ownership in 1.2 billion square feet of space — more than 6,000 customers globally. Those customers are principally in the areas of business-to-business and retail online fulfillment. So, right in the wheelhouse of our listeners and our readers on the magazine. And every year the firm's research division studies that portfolio to identify investment trends and customer needs, and help identifying opportunities, and also avoiding risk, for the coming year. Here to discuss those latest findings with us today is Melinda McLaughlin. She's senior vice president for global head of research with Prologis. Melinda, thank you for being here.
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 02:34
Thank you for having me.
Ben Ames, Senior News Editor, DC Velocity 02:37
Melinda, one thing I noticed right off the bat is that Prologis called these their quote "nonpandemic trends" for 2023. Can you say why they're nonpandemic? Is that because no one can really predict what this Covid's going to do anymore, or is it becoming more predictable, or will they, these trends just occur either way?
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 02:55
Well, these days, I don't think anything's becoming more predictable, but we've spent a lot of time studying the impact of the pandemic over the last couple of years, because there was so much change so quickly. These predictions are really about, given that we don't know what's going to happen there, and it is kind of fading in a lot of economies, at least in terms of how supply chains are functioning and the like, we wanted to look beyond the pandemic and really examine what's going to change in supply chains, regardless of what happens with Covid.
Ben Ames, Senior News Editor, DC Velocity 03:29
Yeah, that makes sense. Now, looking at some of the specific predictions, Prologis says that U.S. warehouse development starts will drop to a seven-year low, even though rent growth is exceeding 10% in pace. Why would development slow down even though demand is rising?
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 03:48
It's all to do with interest rates and what's happening in the capital markets. So, we've obviously had a lot of easy money recently that's been able to be put to work, developing things like logistics buildings, and with this rapid shift in capital costs — so, interest rates just nearly doubling, you know, in a very short period of time — we see anybody funded by debt exiting the market, liquidity crunch, and of course, just overall uncertainty. So, what we'll see out in the market for users of spaces, it actually could lead to a shortage in 2024 and thereabouts.
Ben Ames, Senior News Editor, DC Velocity 04:25
Interesting. That'll really squeezed space even tighter. I know that warehouses, that the usage rate is incredibly high. There's not a lot of empty space, so, some some tough times to come.
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 04:36
I would just say it's important to plan in advance, is always my advice.
Ben Ames, Senior News Editor, DC Velocity 04:40
Yes. Yep. Very well taken. Yep. Thank you. We'll share that for sure. You also say Prologis says that California, in particular, their barriers to development will permanently constrain logistics demand, allowing Texas to become the number-one state for net absorption — which I think is, net absorption, I think, gives the term for how much the market takes up new space. Is that related to some of the political and regulatory issues that we've been covering, like AB5, the gig workers' classification, caps on internal combustion engines, things like that, that we've been covering in the magazine?
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 05:17
You know, I think it's less due to that and simply for the reason that California is an essential and growing market for logistics users. Obviously, the number one port in the U.S. is in California, a lot of high-income consumption centers that you have to service. It's really, to your initial point, about those barriers to development and those capacity constraints. Only 1.2% of space is vacant jn California's main markets today, and between a lack of land and some of the regulatory barriers on development, there simply isn't enough space to absorb for our customers to grow there.
Ben Ames, Senior News Editor, DC Velocity 05:57
Gotcha. Yeah, they're really hemmed in. Fascinating. And I guess, another point to that, or perhaps just a related trend, Prologis says that Mexico demand will hit a new annual record as nearshoring drives expansion along the border. Of course, Texas has an enormous border with Mexico. Will that expansion being in, what, warehousing, manufacturing, transportation? All of the above?
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 06:22
It's absolutely all of the above. So, when you move production, there's a huge multiplier effect, I would say even as far as driving consumption in the local economy. So, we really, especially in the U.S., think of the primary driver of logistics need as consumption, but this trend in nearshoring is extremely interesting, particularly in Monterrey, Juarez. in Tijuana, in Mexico, and so we're watching as companies move their supply chains over there, how it's actually going to flow through to the local economies and to trade flows. So, to go back to the Texas point, absolutely, this could also be part of what's going to help that market grow over time, is more north-south, flows of goods. But we're really in the early stages, and even though we've seen a lot, a lot more planned and enacted nearshoring activity along the border in Mexico, I think we're really just in the first innings of this trend.
Ben Ames, Senior News Editor, DC Velocity 07:23
Really interesting. Well, that'll be something that Prologis and DC Velocity will be following closely in the coming years. It's great to see a sort of sneak peek. And looking off the North American continent, Prologis predicts that India will rise from fourth to the third-most-active country for development starts, development of real estate warehousing, behind the U.S. and China. Is that also related to this sort of post-pandemic restructuring of supply chains?
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 07:52
You know, it's part of the story, but it's bigger than that. It simply is a lot of factors coming together all at once to support India. And so, yes, supply chain diversification is part of that. We do see, you know, big manufacturers like Apple looking at India as a supplemental location for their supply chains, but it's also a demographic story. You know, India has definitely got a lot of young people, and we've seen that trend really yield the need for these domestic-consumption oriented supply chains to grow. We've seen a lot of really positive regulatory and tax changes, such as the removal of a tax on the, on goods movement between states, as well as you know, some positives for foreign direct investment, naturally removed some barriers to entry there, as well as improvement in infrastructure, which is, you know, as all of your listeners know, necessary to facilitate the movement of goods.
Ben Ames, Senior News Editor, DC Velocity 08:57
Yeah, for sure. But really interesting. That's a lot of moving parts, but it looks, like you say they're all coming together at once. And I know Prologis also had another couple thoughts about the coming year. One that caught my eye was was that e-commerce leasing will bounce back to become the second-most-active year on record after 2021. So, I mean, one question that came to mind is, if e-commerce is bouncing back, I didn't know that it went away.
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 09:24
Well, it never went back to its prepandemic level, but it's been an interesting one to watch. While, naturally, we had the surge, as everybody was locked down, we were pretty open, you know, we think there'll be a surge, and then there'll be a little bit of a rotation back toward in-person shopping, travel experiences, things like that as economies reopened, and that absolutely came to pass in sort of the second half of 2021 and earlier this year, and what we see today is e-commerce and its share of retail goods sold reaccelerating. And for those, you know, our customers that need to build out the supply chain to support that, why we think 2022 will be such an active year is, you'll really have the opportunity for a little bit of reinvestment, so there will be a bit more supply for our customers to think about expanding their network to support what is the permanently higher share of c-commerce. So, when you think about designing a supply chain, and you only sell, you know, 10% of your goods online, there's going to be a lot less investment than when that figure is 25, 30, maybe even higher, as a proportion of your sales. And normally, both prepandemic and in more recent times, e-commerce is the source of most of your sales growth. So, you want to put, you know, the emphasis behind, how do we support the growing part of our business? And we really think we're going to see that re-accelerate in 2022. Or sorry, 2023. What year is it?
Ben Ames, Senior News Editor, DC Velocity 10:59
Gotcha. 2023. A lot to look forward to. This has been really fascinating, Melinda. So many changes. We appreciate your coming on the show and sharing some of your thoughts with us.
Melinda McLaughlin, Vice President, Global Head of Research, Prologis 11:09
Really loved being here. Thank you so much.
Ben Ames, Senior News Editor, DC Velocity 11:11
Our guest today has been Melinda McLaughlin. She's with the research division at Prologis. Back to you.
David Maloney, Editorial Director, DC Velocity 11:18
Now let's take a look at some of the other supply chain news from the week. Victoria, you wrote this week about new EPA clean air standards for heavy-duty trucks. Can you share some of the details?
Victoria Kickham, Senior Editor, DC Velocity 11:32
Absolutely. Dave. Yeah, so that's right. The EPA released its strongest ever clean air standards for heavy-duty trucks this week, and it's essentially a move that takes us a bit closer to a zero-emissions future, which of course is something that government and transportation leaders have been working on for many years now. The new standards apply to trucks weighing more than 26,000 pounds, so the typical tractor-trailer used in the freight industry, and they'll take effect with model year 2027. The aim is to reduce smog and soot from the freight trucks that travel our nation's highways, and these new standards are also the first new rules for the heavy-duty truck category in more than 20 years. In addition to that, the EPA says they are more than 80% stricter than previous rules. I should also note that the rule also applies to buses, so heavy trucks and buses. Essentially, the change establishes stronger nitrogen oxide standards for these vehicles, which means that they'll be required to emit less of those poisonous gases that are released from the vehicles' exhaust.
David Maloney, Editorial Director, DC Velocity 12:33
Yeah, obviously that's a good thing. Eighty percent is a big change, though. How's the industry reacting to that?
Victoria Kickham, Senior Editor, DC Velocity 12:40
Well, the rule was just released this week, so it's early, however, to the trucking industry groups that we cover quite frequently, the American Trucking Associations, or ATA, and the Owner-Operator Independent Drivers Association — OOIDA — both issued statements after the EPA made the announcement this past Tuesday. ATA said it's still reviewing the standard and assessing its impact on members, but ATA president and CEO Chris Spear emphasized the trucking industry's efforts to reduce nitrogen oxide emissions over the past 30 years or more. He said the industry has cut those emissions by 98% since 1988, for instance. And it's true that today's diesel engines, which power those heavy-duty trucks, are cleaner than they've ever been. Speer said ATA's concern, moving forward, is that the new standards are, and I'm quoting, "technologically feasible with equipment that is cost-permitting and reliable for fleets." Cost is the big issue for OOIDA, the other trucking industry group I mentioned. President Todd Spencer said the new measures will negatively affect independent drivers and small businesses, who may find it difficult to upgrade to newer, compliant vehicles. Spencer said, and I'm quoting again, "If small business truckers can't afford the new, compliant trucks, they're going to stay with older, less efficient trucks or leave the industry entirely." It's up to the manufacturers of these engines and emission systems now to figure out how to comply with the rules for 2027, so the details on affordability, reliability, and so forth are still to come. So, again, there's a lot to be worked out here, and it's something that we will keep our eye on.
David Maloney, Editorial Director, DC Velocity 14:17
We certainly will. Thanks, Victoria.
Victoria Kickham, Senior Editor, DC Velocity 14:19
You're welcome.
David Maloney, Editorial Director, DC Velocity 14:20
And, Ben, you reported this week on how the Postal Service is making an even greater commitment to a transition to electric vehicles. Can you clue us in on their plans?
Ben Ames, Senior News Editor, DC Velocity 14:29
Yeah, glad to Dave, and this also is really revealing a growing focus on those emissions that Victoria was just discussing. This time it's to do with the U.S. Postal Service. Now, covering the Postal Service used to be kind of a boring beat for a reporter. It's very important, it's crucial, of course, but there was never much drama. The service just lost some money each quarter and that has accelerated in the age of e-commerce, because the post office was designed centuries ago to carry mail more than boxes — that's their most efficient operation. But in recent years, it's gotten a whole lot less boring. During the Trump administration, a new Postmaster General came in. That was Louis DeJoy. He had a background from the private sector and XPO Logistics — that's another familiar name — and he started running it more like a business than a public service, so that sparked some debates, but he's been getting traction on that. Then he signed a contract to buy tens of thousands of new mail trucks, since the old fleet that we're all used to seeing is aging, and they, you know, as Victoria had referenced, those older engines from a couple of decades ago, have a lot higher emissions. But DeJoy had specified that only about 5,000 of those would be electric. That created more debate. There was criticism about, you know, the need to reduce greenhouse gases, but DeJoy said he didn't have enough money, since, as we said, the service, you know, loses money each quarter, and battery-powered vehicles in general cost more upfront than internal combustion. You save on gas in the long run, of course. So then Congress stepped in last year and passed a postal reform bill that helped balance their books, and then shortly after that, there was the Inflation Reduction Act, and that gave more funding to buy green technology. So, all that background, it turned out that this week, the Postal Service will finally be in a position to buy a really significant number of those electric mail trucks.
David Maloney, Editorial Director, DC Velocity 16:26
Well, it seems that they've gone through a lot of conflict and back and forth, but sometimes that's what's needed to get stuff done. What do we know about these new trucks, Ben?
Ben Ames, Senior News Editor, DC Velocity 16:34
Well, first of all, the size of the deal is two buy 66,000 battery electric delivery vehicles. That's part of about 106,000 trucks that they're going to aquire by 2028 — so, over the next five years — and that's a big order. It's obviously big, but it's, even for the Postal Service, it's just under half of the Postal Service's current fleet, which is about 230,000 vehicles. So, most of the new ones, both gas-burning and electric, will be built by Oshkosh Defense — that's a military contractor in Wisconsin. They're planning to build about 45,000 electric units, and then the Postal Service will buy the rest, about 20,000, on the open market, from commercial automakers. But the core model is called the — either way, whichever, whatever the engine is, under the hood — the next-generation delivery vehicle, NGDV, and it looks a little like a duck to me. It has a square body and kind of a long, low hood in the front, but it'll have more volume than current trucks due to carry all those e-commerce parcels. It will also offer more modern technology for better safety and comfort. By the way that includes air conditioning, which most of us take for granted when we're on the road, but apparently, it's not included in those classic mail trucks you see around the neighborhood, so a lot of improvements on different levels.
David Maloney, Editorial Director, DC Velocity 17:56
Yeah, sounds like it will be some nice additions to the fleet. Thanks, Ben.
Ben Ames, Senior News Editor, DC Velocity 18:00
Glad to.
David Maloney, Editorial Director, DC Velocity 18:02
We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories. And check out the podcast Notes section for some direct links on the topics that we discussed today.
And again, our thanks to Melinda McLaughlin of Prologis for being our guest. We welcome your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com.
We also encourage you to subscribe to Logistics Matters at your favorite podcast platform. Our new episodes are uploaded on Fridays.
Speaking of subscribing, check out our sister podcast series Supply Chain in the Fast Lane, coproduced by the Council of Supply Chain Management Professionals and Supply Chain Quarterly. Our latest series deals with attracting and retaining labor. Subscribe wherever you get your podcasts.
And a reminder the Logistics Matters is sponsored by Aptean. Aptean routing and scheduling supports logistics and delivery fulfillment operations with the tools needed to optimize resources, automate route planning and proof of delivery processes, and drive savings of up to 30%. Your delivery operation can be a powerful vehicle to deliver game-changing customer service. Aptean routing and scheduling can help. Visit aptean.com and discover how now.
We're going to take a holiday break next week to spend some time with our families, so we will again gather with you in two weeks as we usher in supply chains into 2023, so be sure to join us. In the meantime, we wish you a Happy Hanukkah, Merry Christmas, and a very joyous holiday season. This is Logistics Matters, signing off for 2022. Thanks for listening.
