There is a looming challenge brewing for the industrial sector in North America: securing adequate power for their operations. With the resurgence of onshoring and nearshoring, increasing automation of warehouse/distribution facilities (including the use of power-intensive AI), the boost in manufacturing from the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and CHIPS Act, as well as the explosive growth of data centers, there is a pronounced supply/demand imbalance on the horizon.
“There is a massive amount of power being required by [industrial] operators going forward,” says Chad Griffiths, SIOR, partner with NAI Commercial Real Estate in Edmonton, Alberta, Canada, and chair of the SIOR Technology and Innovation Committee. He notes that while manufacturers have traditionally been the heavy power users, the warehousing side – the largest component of industrial real estate – has historically used minimal power, but that’s beginning to change. “With electric forklifts, racking, retrieval, and conveyor systems as well as robotics, a ton of automation is being put into these buildings, and all of that requires considerably more power. As the industrial stock continues to grow, we’re going to need more and more power.”
The Electrification of Everything
To educate SIORs on this issue and to help them develop strategies for providing solutions for their clients, Griffith and Chris Collins, senior manager of admissions at SIOR, developed a program for the SIOR 2024 Fall Event in Los Angeles, “The Electrification of Everything.” Moderated by Geoff Kasselman, SIOR, CEO of Op2mize Energy and SIOR Global past president, the panel included Kim Snyder, president of Prologis’ West Region, who serves as the de facto liaison between the real estate and energy sectors at the firm, and Jay Todisco, affiliate member with SIOR and president of CRE design firm Ware Malcomb.
Kasselman kicked off the session with an overview of the fast-approaching dilemma, citing a report by global consulting and technology services provider ICF that concludes the electrification of buildings and vehicles, driven by companies’ objectives of reducing carbon emissions, will increase U.S. electricity demand by 9% by 2028. The manufacturing of batteries and fuel cells, the increase in AI usage, the rise of data centers, and cryptocurrency mining are all contributing to the increase in demand that is putting enormous strain on the electric grid. One concrete example of AI’s impact is the use of ChatGPT. A single ChatGPT query needs nearly 10 times as much electricity to process as a Google search, according to a report by Goldman Sachs.
“This supply-demand imbalance is a big deal, and if you didn't know there was a shortage, please leave this room knowing that there is a shortage and it will be a challenge to (close) that gap,” Kasselman told the gathering, ominously adding, “There are no new power plants coming online anytime soon that can deliver power at scale.” He noted that the industrial and transportation sectors accounted for approximately 70% of the electrical power used. “Who’s consuming all the power? The answer is a collective ‘We’ – our clients, our buildings, our trucks, and our vehicles”. He also pointed out that the largest occupiers of data centers are Meta (24.8%), Google (11.3%), AT&T (8.8%), Microsoft (8.1%), and Amazon (7.3%), making these tech companies some of the largest consumers of electric power in the U.S.
Snyder said power concerns are top of mind for Prologis’ clients as they add new technologies to improve operations. “Customers are asking us, ‘How do I upgrade power? What do I have to do? How long is it going to take? What is it going to cost? Are you going to do it for me? Are you going to charge me for it?’ and almost every customer has some need to add something that gets plugged into a building that we operate,” he said.
“With that many customers, we're seeing a lot of new things that we need to educate ourselves about, and we also need to start cataloging what these customers want…there's so much stuff that needs to be plugged into the grid that there's just not enough power to go around.”
Finding the Power
Kasselman assured the audience that access to electric power and natural gas was not solely in the hands of monopoly utilities. Many states and territories throughout North America are deregulated for gas and electricity, and there are numerous licensed independent system operators across the U.S., providing alternative options for securing power.
To stay ahead of the impending power drain, several Big Tech firms are going nuclear. Microsoft, Amazon, and Google have entered into agreements with nuclear power operators to enable them to supplement their use of renewable energy sources (wind, solar, hydro) while maintaining net-zero carbon goals. Last fall, Microsoft signed a 20-year deal with Three Mile Island owner Constellation to purchase all of the plant’s electric generating capacity over the next 20 years for its data centers. Google is partnering with Kairos Power in California to develop a fleet of a half-dozen small nuclear reactors (SMRs) that will each produce about 500 MW of power, and Amazon is investing $500 million in SMRs with three separate companies to generate emissions-free electricity.
Adapting Existing Sites
Brokers assisting companies seeking abundant power for their operations may find that repurposing obsolete manufacturing facilities could meet that need. Snyder pointed out that manyheavy manufacturers are relocating from California to Texas, leaving behind large-scale facilities with ample power infrastructure that are ideal for redevelopment. “As a real estate [broker], you need to think about the intrinsic value in the real estate that is not lost. Almost all of it is actually reusable… so thinking about those land sites a little bit differently before they're completely demolished to see what kind of reuse opportunity might exist with regard to the utility infrastructure…is huge.”
Shuttered coal mines represent another potential source of enormous power capacity. Todisco, who has an extensive background in land planning, said his firm is looking at two such sites, which offer a multitude of benefits in addition to available power. “There's an abundance of toxic water that can be used for cooling at an industrial scale, and there are volumes of ammonia in natural gas that could be converted to hydrogen,” said Todisco. “So, we're self-generating on site, not relying on a utility, we're self-cooling on site, and because these are defunct coal facilities, they're always adjacent to rail lines. These are self-sufficient sites that hyperscale [data centers] are identifying…because the power demand is so great.”
What Developers Need to Know
Todisco stressed that developers of commercial real estate need to adjust to the new realities of power requirements for buildings. “We're talking about buildings that are really different than what we're all accustomed to as developers, and the metrics that we apply early on in the process are really different.” Site analysis is no longer simply a matter of determining land, construction, and soft costs and calculating rents and a cap rate. Access to power needs to be considered in the early stages of planning.
Snyder and Todisco advocated for developers and brokerages to integrate energy professionals into their teams. “I would recommend to every commercial real estate brokerage house and every developer… you need to hire people on staff,” said Todisco. “Utility consultants are very much in demand now, people who have a regional understanding of what's available, who have regional relationships in place, who can negotiate with utilities and municipalities…those are going to be the most valuable people on your staff if you really want to get into this space.”
Snyder concurred. “Whether you have someone on your own staff or a third-party utility consultant…those folks are so valuable right now in terms of helping you see the future and [get the power you need].”
Kasselman also cited a report by Prime Data Centers that provides a checklist of what data centers (and thus developers should be) are looking for in a site. Although it is designed for data centers, it could also be applied to industrial uses.
What Brokers Need to Know
“I think the best thing that brokers can do – and I'm putting myself in this camp as well – is to really gain an understanding of what their clients are going to need,” says Griffiths. Forward-thinking companies are likely to automate their operations (storage, sorting, and retrieval systems, electrified vehicles, etc.) in the near future, and brokers need to educate themselves so they can better serve their clients. “This will be a massive problem that is not on people's radar right now, and I think that's where brokers can really add some value by giving guidance to help clients solve these problems in advance.”
Kasselman reiterated that point in his closing remarks: “We've all learned new tricks over the years, so we need to be ready to learn a couple more things in order to unlock the value of the electrification of everything,” he concluded.