Robots and Automation with Erik Hernandez #700

Bruce Norris is joined this week by Erik Hernandez.  Erik is a commercial real estate agent and a senior vice president and principal with Lee and Associates in Ontario specializing in industrial real estate. Erik’s specialties include active tenant-buyer representation, landlord representation, land sales and development, build-to-suit assignments, and investment sales and analysis. Erik’s real estate career now expands over 20 years in the Inland Empire, and he’s achieved recognition for many notable transactions. He has been involved in over a billion dollars worth of commercial real estate transactions. See below for full video and resources.

Episode Highlights

• Could California see more out-migration, and how will this affect future demand?
• What does Erik see the future being like with robots and automation?
• How does he see things working out for people wanting a discount on real estate?
• What was interesting about the product and inventory that accumulated during COVID?
• Could we be seeing more things manufactured overseas start being made in the U.S.?
• What’s an interesting statistic regarding China’s use of concrete compared to the U.S.?
• How does the amount of money being passed out right now compare to the Great Recession?

Episode Notes

Bruce Norris: Hi, thank you for joining us. My name is Bruce Norris, and back with us again today is Erik Hernandez. Erik is a commercial real estate agent and a senior vice president and principal with Lee and Associates in Ontario, specializing in industrial real estate. Erik’s specialties include active tenant-buyer representation, landlord representation, land sales and development, build-to-suit assignments, and investment sales and analysis. He’s been at it for over 20 years, and Erik, welcome back.

When you think of future demand, to me it looks like California is gonna lose migration of people for the foreseeable future. I don’t know, but I would bet that the migration of businesses will also follow suit. So you and I had talked before a day or two ago about future demand for industrial space, and you were pretty optimistic about that.

Erik Hernandez: Well, I think the two factors we talked about earlier about being an alternative, and we are the alternative in Southern California if you want to be in California. Actually the Inland Empire is often the destination of last resort for a company that actually leaves California. If you’re in Los Angeles, Orange County, you can at least cut your costs if you come to the Inland Empire because real estate prices are typically cheaper than they are in L.A. and Orange County. Often, the employers find that many of their employees already live in them an empire and they’re commuting to L.A. or Orange County too. I think that and the combination of being close to the ports of L.A. and Long Beach, you know, all the international trade that happens in the containers and goods that go back and forth, especially that come in through the ports of L.A. and Long Beach, those goods have to have a place to go so that they can get broken down and either have some type of value add done to them or picked and packed and then redistributed out to wherever they need to go. The Inland Empire is the place to be for the goods movement and logistics industry on the West Coast. I think the future continues to be bright as far as growth and development goes for many years to come.

Bruce Norris: One of the people that I respect a lot is Sean O’Toole with PropertyRadar. He is usually part of a panel at the Nixon Library event that we’ve had every year for the last 10 years.

Erik Hernandez: Oh, yeah, I’ve seen him speak there before. I remember.

Bruce Norris: He’s always bringing us stuff I’ve never heard of before. Ten years ago it was a 3D printer. I was like, “What the heck is that?” And he bought one for his 10-year-old son who now has a line of products for airplanes. So I mean, he’s ahead of the curve, and one of the things he said a few years ago was, “America’s biggest difficulty is how to have a society when half of the people don’t have a job.” And so what I want to ask you is, what do you see about the future of automation and robotics? It may take up square footage in an industrial space, but I don’t know that it’s going to be filled with human beings working.

Erik Hernandez: Well, that’s an interesting observation because there have been some notable companies that maybe expanded their footprint, say, for the size of the building they were taking. Skechers is a good example when they relocated out to Moreno Valley. Now I’m speaking secondhand on that, so this would have to be independently verified. But my understanding is that the employee count actually went down pretty dramatically when they made that move because of the automation that went into the building. It might have been a reduction in headcount of maybe 30 percent, maybe even 40 percent, when they made that move. Now, the equipment they installed in that building is absolutely state of the art. If you think about the people that were involved to design that system, it’s high-level engineering work that needs to happen. There’s also the knowledge that you need to then operate that machinery and equipment. This also takes a higher skilled level of knowledge or training to be able to work in that, not just moving pallets around. I would imagine that maybe the pay rate for people working in that building for the higher-skilled positions would go up, but the headcount went down. I think that’s probably what we’re going to see more of.

I know John Husing used to talk about that a lot, too, about how the way technology was changing in industrial buildings, that the caliber of persons that you’ll have as far as the training and knowledge, and a lot of that could be on the job training that employees offer to go out and find people and then teach them how to use their systems and then hopefully pay them more to operate the equipment and all the things that happened in the building to operate it. But I do think that’s happening now where you might see these large industrial buildings; and depending on the type of building, you may see less people in them and more technology. Amazon is a good example. One of their two buildings there in Eastvale has a very high headcount. Thousands of people. The other building has thousands of robots. And I don’t want to misquote the number of robots that someone had told me second hand was in that building, but I can definitely say that it’s in a thousand. When I first hear that number, it blew my mind. It’s pretty amazing.

Bruce Norris: I think Sean told me to watch a certain video, and it was Amazon’s system of picking materials for delivery. The robot goes in and picks up the shelf and delivers the shelf to the person that picks the part off the shelf. The robot returns to the shelf that he just took out, and I don’t mean just the shelf. I’m talking about the whole section of shelves that get taken. The robot’s passing by one hundred other robots doing the same thing two inches apart. All in all, the corridor is kind of crazy.

Erik Hernandez: I’ve actually had a few people that have been in those buildings describe it to me. One said it was like a scene out of Star Wars where all the droids are running around each other. Another one described it as a bunch of rumbas running all over the floor because some of those are actually engineered in a way where they’re pretty strong and can actually move around pallets at a time. You got to hand it to Amazon for what they have done from a technology perspective. They are so pioneering in ways to come up with to try to reduce the time it takes to get it from when you received the order from the customer to getting it out the door. They really changed the world.

Bruce Norris: I want to wrap up with a last question. It’s certainly been a strange year. Whenever you think about, “Well, what do you wanna do this weekend?” “We’ll go out to eat.” “Oh, no.” “We can’t go to a ballgame. Can’t go to a movie.” You’re reminded constantly that things are different. When I think about maybe I can get something at a discount, for real estate it would certainly dawn on somebody how that’s going to work out for people.

Erik Hernandez: So it’s been an interesting time. I’ve had a few clients out looking to buy or rent buildings during this time, and some of them have gotten very aggressive. I don’t think anyone else has coined this, so I think I’ll take credit for it because I never heard anyone say this. Everybody wants the COVID-19 percent discount. Right. They think that the prices came down, and they want 19 percent off. I’ve written some offers that have been very aggressive. I’ve received more offers on properties I have that were 25-40% off of what I was asking. The landlord looked at me, and I’m like, “What are these guys doing? Why do they think the market has fallen that far?” Well, if you turn on the television any day over the last, maybe a month ago, right; two months ago, it felt like everything should be on sale. Retail came to a standstill. Office deals were actually happening during that time. There were some very large industrial deals that actually got signed during that time that could have easily been put on hold. One was a rather large deal. One in Norco, a large multivitamin gummy company advertised on television, leased a four-building, several hundred thousand square foot complex in Norco, brand new construction. They basically turned it into a manufacturing campus for all of their vitamins. You know, corporate headquarters, expansion here in California. It was a very notable deal, and that got signed during the middle of this stay at home order. That deal could have easily been put on hold. No one would have faulted anybody for saying, “You know what? We’re just going to wait a few months and see how this shakes out because this is a big investment for us.” No, they had to do something, and their business was growing. They made a very large, substantial investment commitment to move forward. Deals like that were happening during that time.

So here’s an interesting thing that, on the industrial side, I can speak to. The level of product and inventory that started to accumulate during this time is really interesting. So I’ll give you an example. Let’s use anything that was sold in a retail store. Furniture or apparel and clothing is another good example. A client of mine had put a one hundred thousand square foot space on the market for sublease. This was right before COVID happened, maybe a month before. We put it on the market, we had some activity. COVID happened, and everything went silent. This is part of a larger building, about 400,000 square feet. They leased it long term. They had about 25 percent of the building that they expected to grow into in maybe 12 to 18 months. They were going to sublease it out to somebody. Well, during that time, all of the team on their logistic side who had worked at Amazon and some other large distribution companies were all telling me that their phone was ringing off the hook because everyone they knew in the industry was calling looking for overflow space. So all these companies that had clothing or furniture or things that they thought they were going to sell wasn’t moving. Right. Because we now operate in a time of this just in time inventory, when things don’t turn, you have more product coming in from overseas or locally here. You have to have a place to put it, like oil or whatever. That’s a whole other story, right?

Bruce Norris: Yeah. Minus twenty-five dollars a barrel.

Erik Hernandez: So here’s what happened. A large apparel, no retailer, no-name brand household name tracks down my client through the relationship they had, and I don’t want to speculate on the exact value of the inventory. I would just say it was in the tens of millions of dollars minimum. They basically had their spring 2020 collection. Right. Clothing and bags and things like that that they weren’t able to sell. They decided to store it for nine months and basically lock it up, and next year they’ll bring it back out of the warehouse and put it in retail stores, and it’ll be their spring 2021 collection. That was a cheaper alternative than for them to just completely liquidate his brand new inventory that they weren’t able to sell during this time. There’s a lot of that happening. On top of that, I think both anecdotally and firsthand, I’ve heard from clients of mine that people are going to want to keep a little more inventory on hand so that if there are any future supply chain disruptions, you’ve got the inventory already sitting in the warehouse. You’re not waiting for someone in the supply chain to bring you the part that you need so they can make whatever device or thing that you sell into the end consumer, customer, whoever it is.

What’s that old poem? My Kingdom For A Nail. During this time, there was an article I remember reading about how the new SUV Palisade, really hot SUV, couldn’t be made anymore because there was a supply chain problem. They were coming from somewhere in China, and the factory had been shut down. So imagine you can’t make a car because you don’t have the door locking mechanism to complete the car. You’re on hold. If you’re the car manufacturer, you’re probably looking at it and thinking we need a six month supply of door locks and windows and doors. Think of everything that goes into a car because that was a really popular car, and they ran out because they couldn’t sell any because the supply chain had that type of disruption.

Think about the thousands of parts that come from different suppliers that go into the making of a car or a ventilator, or take your pick of sophisticated equipment. You can’t afford to run out of door locks or whatever the equipment or piece or part is so that you can’t finish your product. I think that’s going to have an interesting effect on the demand for industrial real estate over the next few years, even if you increased that footprint by five percent in, let’s say, Southern California. Now, that could have an impact of 30 to maybe 50 million square feet footprint wise of additional real estate that’s needed to store that additional inventory. Now, I’m speculating a little bit, right, because we’re spitballing a little bit, but it’s pretty easy to imagine how that could happen. So going back to your question about people looking for discounts on real estate, a lot of people have been looking for that COVID-19 percent discount. I think there will be a few deals that go down at maybe a discounted price versus where the market thought they were going to go down at. But I don’t think we’re going to see the type of distressed or discounted pricing, certainly for industrial real estate that might have been conventional wisdom two months ago. That’s for sure.

Bruce Norris: I would imagine, too, because of the Coronavirus, you might, in fact, get more manufacturing of things like medicines that show a backup in the United States instead of us relying on foreign countries to send it to us.

Erik Hernandez: That’s a whole other thing that I’m not even sure people have wrapped their head around. We’ve sent companies and manufacturing facilities overseas now for going on 20 something years to China, and then they transition to Vietnam and other places. I didn’t realize even internal during all of this when you see these statistics about the high percentage of our really important medicines that are made overseas. I don’t know about you, but if I was sitting in a room and they were talking about that, I would just look around and say we need to bring that percentage down to zero. One hundred percent of any medicine that we need should be made in the USA. Period. We should not have to have a supply chain taking care of people in our country.

Bruce Norris: Exactly, especially if somebody could do something intentionally to say, “Well, you know, you’re not gonna get it.” That’s unthinkable, and to put ourselves in that position is not smart. So I do think there’ll be some ramifications of that.

Erik Hernandez: I think there are certain things that, just for national security or being pragmatic, should be brought back. Medicine is a great example. Here’s another one. How about cell phones? I’m on my iPhone right now. What would happen if Apple came out and said – well, I think it’s actually happened already with them on a phone that they thought they were going to produce and they delayed it. But what if Apple said, “Gosh, we can’t make cell phones for three or six months because of some supply chain problem?” How much time do we all spend on our phones every day? Imagine if your phone broke and you couldn’t go get a new one. I know that’s inconceivable right now. Right? We’re maybe stretching how far that might go. If I was sitting in a room, I’d tap Apple on the shoulder and say, “We need you to come back to America and at least build one plant in the United States where they either do it directly or they use Foxconn as their supplier to build a factory in the United States that could make iPhones.

Bruce Norris: I see that coming back. I really do.

Erik Hernandez: I hope it does. I mean, I think that would be great for jobs here in the United States. Unless you lived in a lot of these towns that were really gutted over the last 20 years when a lot of the manufacturing jobs were sent overseas, you don’t realize the impact that had over time. Some of those cities have really transitioned and made a comeback, and some areas have never fully recovered. When you look at these glistening new cities in China, more power to them for what they’ve been able to accomplish, but that’s been built at the expense of some of that development and investment that could have happened in the United States. Now we’re seeing the result of that.

Bruce Norris: Here’s an interesting statistic, and we need to wrap up. In three years, China used more concrete, poured more concrete than the United States did in a 100 year period during the Industrial Revolution.

Erik Hernandez: That is amazing.

Bruce Norris: When I saw those charts, I thought that is completely nuts. Erik, I really enjoyed talking with you again. Let’s maybe do it at the end of the year because, again, this could be a game-changer. I have some tax law changes. Hopefully not, but we’ll touch base maybe toward the end of the year and see how things are going.

Erik Hernandez: Remind me when we chat at the end of the year, and I’ve talked about this with clients and partners of mine. I believe I’m up to eight or nine trillion dollars that the United States has come up with. I’ll have to get some detail on that and get back to you. But, when you look at the amount of money that is being dropped from the helicopter, if you will, from the Federal Government, Treasury, the Federal Reserve, I mean, it really is an unprecedented time that we’ve gone through between, you know, the PPP program, the Federal Reserve and Treasury putting together their four or five hundred billion dollar fund to leverage that $4.5 trillion for a main street lending facility. The amount of money that is being passed out right now dwarfs what happened during the Great Recession in 2009. It’s really staggering and just amazing.

I’m really curious to see how that’s going to play out over the course of the rest of the year. I’ll admit I don’t know how it’s going to play out. Real estate next year could be either down, which wouldn’t surprise me, and it wouldn’t surprise me if prices were higher as well with the way interest rates have been kept low. They came out this week and said they’re going to keep them low for a long time, at least until 2022. Just amazing.

Bruce Norris: Yeah. So you’ll have a couple percent interest rate on the 30-year mortgage for quite a while. It’s going to be interesting. I’ve got to think about all that stuff, too. Erik, if we have people that are interested in industrial space, tell them how they can get a hold of you.

Erik Hernandez: So I’m a principal here at Lee & Associates in Ontario, and you can give me a call at nine 909-373-2934. Or or send me an email at erik@lee-assoc.com.

Bruce Norris: All right Erik. Thanks for joining us. You have yourself a great afternoon.

Erik Hernandez: Always great to catch up with you Bruce. Take Care.

Bruce Norris: Thanks. Bye-bye.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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