April 12, 2024 • 22 mins
In 2021 and 2022, the US economy experienced historic shortages of many different goods. All kinds of consumer, construction, and high-tech components were tough to come by. Since then, most of these shortages have eased or gone away, but there is one category that is still struggling to meet demand: electrical components. Years after the height of the pandemic squeeze, there are still complaints about missing transformers and switchgears, which are crucial for connecting new construction developments to the power grid. So what's going on and how much is this shortage messing up economic activity? On this episode, we speak with commercial real estate developer Chris Hatch, partner at Forza Development, about how the situation is hurting his business. He talks about projects that are entirely finished — except for this one necessary component. We walk through the causes of the problem and how costly the delays are proving to be.
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Speaker 1 (00:03):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
What's up?
Speaker 3 (00:10):
Chris's Joe?
Speaker 2 (00:11):
Hi? How are you today? Hey Chris?
Speaker 1 (00:13):
How's it going? By?
Speaker 2 (00:14):
Tracy? How are you today?
Speaker 1 (00:15):
I'm good? Thank you. I'm sorry we kept you waiting.
I saw your tweet, No problem whatsoever.
Speaker 2 (00:21):
I was just giving you guys a hard time.
Speaker 3 (00:22):
So Tracy, we're back with our favorite Dutch bros. Brow
the brow of the Brow of Dutch Bros.
Speaker 4 (00:34):
I did a deadlift one two, Jimmy, Okay, what's.
Speaker 2 (00:41):
Uh?
Speaker 1 (00:41):
Marges?
Speaker 3 (00:42):
This isn't After School Special, except.
Speaker 1 (00:43):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve in the US.
Speaker 4 (00:49):
Where's the best with imposta?
Speaker 1 (00:51):
These are the important question? Is it robots taking over
the world?
Speaker 2 (00:54):
No?
Speaker 3 (00:54):
I think that like in a couple of years, the
AI will do a really good job of making the
Odd Lots podcast and people Today, I don't really need
to listen to Joe and Tracy anymore.
Speaker 4 (01:05):
We do have.
Speaker 3 (01:07):
The perfect welcome to lots More where we catch up
with friends about what's going on.
Speaker 1 (01:13):
Right now, because even when Odd Lots is over, there's
always lots More.
Speaker 3 (01:18):
And we really do have the perfect guest, Chris Hatch.
We talked to him several weeks ago about opening up
drive throughs. But Chris, what are you up to these days?
Speaker 2 (01:30):
Yeah, just continue to try and build buildings and figure
out how to get some of the stuff out of
the ground and get these projects built and constructed. It
seems like it just grows harder every day, more and
more challenges.
Speaker 3 (01:44):
So yeah, So, Tracy, We've talked about like almost every
supply chain crisis under the sun over the last three years.
But there's one thing it's been in shortage for forty
two straight months according to the ISM, and that is
electrical transformers and parts. We've never talked about that.
Speaker 1 (01:59):
You finally get to do your Transformer episode.
Speaker 2 (02:02):
Chris, what's your Transformer in the electrical Sorry, I guess
I have a six year old son and you talk
about Optimus Prime.
Speaker 4 (02:09):
Yeah, yeah, or basically not.
Speaker 2 (02:12):
Stop at my household?
Speaker 1 (02:15):
Yeah, I know them.
Speaker 3 (02:16):
Well, what does it mean when you're trying to build
a new Starbucks or Dutch Bros. Location off the side
of a highway in Texas?
Speaker 2 (02:23):
Let's use Utah if that's okay, And mostly just because
it's easier. There's less power companies in Utah. So starting
with Rocky Mountain Power, who supplies the power for probably
eighty percent of the state of Utah. There are a
few cities that have the power company. There's a different
power company Southern Utah. You have kind of the main grid,
So think of that as like, you know, basically the
main power supply that's going into a huge city. And
(02:46):
so once you come off of the grid, the first
place the electric comes to is a transformer that sits
on your site. And the easiest way to think of
it is this is kind of it's a green typically
or blue or some kind of kind of darker landscape
colored cabinet that sits in the landscaping area somewhere. It's
usually two or three feet tall, maybe sometimes four or
(03:07):
five feet tall, about three or four feet square, and
that's where the power comes in from the power grid
to your site. So that is transfer. Got it.
Speaker 1 (03:17):
So Joe finally gets his transformer episode. I think he's
been tweeting like religiously every time the ISM survey comes
out where they're talking about the shortage. But is it
at all common for transformers to go through periods of
scarcity or has what we've seen over the past couple
(03:37):
of years now been unusual.
Speaker 2 (03:39):
Yeah, that's a great question. Definitely, during the kind of
over the last four years, let's just call it kind
of the post COVID world, we've definitely seen some real
strains on the supply of transformers into the world. At
the moment, with at least the type of buildings that
I'm building, the transformers actually aren't the longest lead supply item,
So that's the first step of where the power comes
(04:02):
off of the line, and it's actually the switch gear
that's the problem right now today is that there's these
massive delays with switch gear that are going in the
United States right now.
Speaker 3 (04:12):
What's switch gear?
Speaker 2 (04:14):
So power comes in from the grid to the transformer,
from the transformer to the meter, which makes sense, that's
that's what the power company comes and reads to determine
how much power you use in a month, and then
from the meter it goes to the switch gear. The
switch gear is where the power comes to your building.
So this is usually cabinatry that sits flush or on
the back of the building or one of the sides
(04:35):
of the building most of the time. And that is
in the example that I've got of a building that
we are done building the building in West Valley City, Utah.
I need a sixteen hundred amp switch gear piece so
that electrical supply is enough to power sixteen hundred amps
going into the building. So from the switch gear, then
(04:58):
the power gets distributed to the pan in each individual
tenant space.
Speaker 1 (05:02):
Wait, so when we say there's a shortage of transformers
or switch gears or whatever, what do we actually mean
here is that you can't get them. So the problem
is your lead times expand, or the problem is there
are enough of them to satisfy demand, and so prices
go up, maybe to a prohibitive point.
Speaker 2 (05:24):
Maybe To start with my specific example, I originally ordered
my switch gear a year ago, April of twenty twenty three.
I was told that there was a one year lead time,
which felt like an exorbitantly long time. That's longer than
you know, the lead times kind of we're building over
the last three or four years. But that was the
longest we had heard up to that point. So we
(05:49):
set a schedule with my contractor to have the building
more or less complete right in April of twenty twenty four,
so that the switch gear would then arrive and we
could power up the building and then the tenants could
step in and do their individual build out. The problem
is that four weeks ago, for the first time, the
supply house called my electrician, who called my general contractor,
(06:10):
who called me and said it might be up to
one more year.
Speaker 4 (06:16):
What does that cost you? Yeah, because you have to
finance this.
Speaker 3 (06:19):
So it's like, you, could you tell us what's being
built here? Is it another Dutch Bros. Or a Starbucks
or something.
Speaker 2 (06:26):
It's a great question. This is a four tenant building.
It's all restaurants. Cafe Rio is a Mexican grill with
a drive through, Marcos, Pizza, Chip which is a cookie company,
and Jersey Mikes.
Speaker 3 (06:37):
So what happens when your general contractor or whoever it is,
gets the call from the electrician like, okay, you got
to wait another year.
Speaker 2 (06:47):
You don't just drive to home depot and buy one
of these parts. They don't exist. So you really have
not a lot of great options at that point. And
so it's been interesting because most of the people that
are sitting in my seat as the developer have no
idea what to do. And I mean I have talked
to probably two or three hundred developers over the last
(07:09):
two months, you know, a month. As soon as this
problem became real, I've just started calling every peer I
know in the space anywhere trying to figure out how
I can solve the problem. And I would tell you
that at least half of the people I've talked to
are building buildings with a very similar power requirement to mine,
and they might they're not as far along in the
(07:30):
process as I am, and they're you know, kind of
content because they're like, well, we don't have that problem.
Our switch gear is supposed to be here on this day.
And as I've dove in further on, there is a
big problem. It's not just me. It's not some micro
issue for Chris Hatches building. This is a massive issue
that's impacting the whole you know, all of North America.
Speaker 1 (07:49):
Really there should be more switch gear sympathy in general.
But Okay, I get that this is incredibly frustrating for you,
and you know, waiting a whole year for something and
then being told that actually it's going to be another
year is kind of crazy. But in terms of the
actual financial impact, who does that fall on. Is it
(08:11):
you as the developer, or is it like the retailer
Dutch Brothers or whoever who might have preleased that space.
Speaker 2 (08:20):
Yeah, in this case, it is the developer that's going
to take the brunt of that impact. So it's the
developer being me and my investors that are in the building.
The good news is we built in a few line
items and contingency line items. You don't necessarily hope to
burn through all the contingency line items. And it's hard
for me to guess when the switch here is going
(08:41):
to arrive or when I'll be able to source it
through an alternate means. If I just look at the
one year out and we sit with this building. My contractor,
by the way, finished the entire building two fridays ago,
so they're done with the site. There's nothing left for
them to do on the building until the switch gear
gets here.
Speaker 3 (08:57):
So there's this whole complete building that would others be
totally ready for the Mexican restaurant and the pizza restaurant,
et cetera to move into. And the one thing that's
preventing it is this part that could still take another year.
Speaker 2 (09:10):
Yes, and I mean we're just we're not doing anything
crazy here. We're trying to serve the world. You know,
tacos and pizza and cookies and sandwiches, right, you know,
And so if I just sit for one year, you know,
first off, I'm going to have to go extend my
loan with the bank for sure, because I don't think
I have a full year of time. But if they
allow me to continue on it more or less the
(09:32):
same terms I'm at today, my dead interest carry just
my just my interest expense for holding the building for
a year or one hundred and fifty eight thousand dollars.
Speaker 1 (09:41):
Wait, I still don't understand, like why do we have
the shortage again? Can you maybe expound on that a
little bit more? Like what is the bottleneck here? Exactly?
So okay, switch gears, sure, but like who is making
these things?
Speaker 4 (09:55):
Yeah?
Speaker 2 (09:57):
Sure? So if you think of it in terms, if
you start looking at it through first, how the contracting
typically works. A developer contracts with a general contractor when
he goes to decide to build a building, and the
contractor is going to build that building for them. The
contractor then signs up subcontractors, one of which is an electrician.
The electrician then signs up through a supply house an
(10:20):
order that's going to get filled. You know, and what
they're filling is whatever the developers, you know, electrical engineer
had specked for the building.
Speaker 1 (10:28):
Right.
Speaker 2 (10:28):
So in this case, it's this sixteen hundred and am
switch gear and then you know, my five panels that
I've ordered, and so he's ordering that through a supply
Here she was ordering that through a supply house, and
then occasionally a supply house orders through a larger regional
supply house, and then the regional supply house then orders
from the manufacturer. Right, So haldful steps, But that's kind
(10:49):
of how the contracting works.
Speaker 3 (10:50):
That was literally just the description that was this, you
just walked us through the supply chain.
Speaker 4 (10:55):
Okay, keep going, but that was fantastic, yeah, right.
Speaker 2 (10:58):
So the real of that exists here is that there's
more or less five big manufacturers of all of this
electrical gear. So whether you're talking about the panels, or
the transformers, or the metering equipment or the switch gear,
all of it, it's all coming more or less from
five big manufacturers. Semens, Eaten, Color, Hammer, Square D and
(11:19):
then GE sold off recently there unit a couple of
years ago, and I can't remember the subsidiary that they've
sold it to. But those five provide the electrical components.
Speaker 3 (11:42):
When your developer talks to the electrician, or the electrician
talks to the supply house, or the supply house talks
of the regional supply house, of the regional supply I
was talking to the manufacturing Did they give you a reason?
Do they say what's going on? Or do they explain why? Hey,
we told you it was going to be April twenty
twenty four, and now it's going to be April twenty two.
Speaker 4 (12:00):
Do they give you some sort of excuse?
Speaker 1 (12:02):
Or yeah? Can you can you call them up and complain?
Can you be like an electricity Karen or something like
what what do you do?
Speaker 2 (12:09):
Yeah, there's not much recourse. I mean, that's that's the downer.
It's an interesting world. And I don't know why it
is exactly. And and Joe, you and I were tweeting
about this or dming about this before the show. But
for whatever reason, anytime you deal in electrical electrical is
hand in hand with man'splaining. It doesn't matter what you do,
somebody's gonna man explain you how you're wrong. And so
(12:31):
even this podcast episode will come out and hundreds of
people will man explain, Dared say something or Tracy, Yeah.
Speaker 1 (12:38):
It just I'm sure man explain to me.
Speaker 2 (12:40):
I'm not.
Speaker 1 (12:41):
If a guy explains transformers to another guy doesn't count
as man explaining.
Speaker 4 (12:46):
Then it's just explaining.
Speaker 1 (12:48):
Explaining in a gender.
Speaker 3 (12:50):
What did I tell you?
Speaker 2 (12:50):
What?
Speaker 3 (12:51):
What's the what's the how do they man explain it to?
Speaker 2 (12:54):
Well? That's the interesting thing. It's it's you know. I
So I started calling through. I started with my electric
Then I went to my supply house, and I quickly
realized my supply house. We have two supply houses in
the state of Utah, and they're both too small for
the vast majority of their orders. They order through a
regional supply house. They don't order direct from the manufacturers,
(13:15):
and so that's not a very good position to be in.
And so I started I going to Twitter, I went
to LinkedIn, I went to colleagues. I started pushing this
message out and since then, I have spoken to somewhere
around one hundred people that have told me they have
a guy or they have somebody that can source the
materials that you know what I need the switch gear,
and I've been off phoe with them, and a lot
(13:36):
of those folks were the regional supply house contacts. And
here I had to try to not lose my cool
because multiple times I was talking to somebody the regional
supply house and my particular order is for Siemens switch gearboard,
and so the regional supply house person would talk to
me and say, well, give me your you know, give
me your spec send them all over to me. I'll
(13:57):
call the manufacturer, I'll find out where you are in
the order process, and then I'll call you back and
tell you if I can move you up, and then
what it will cost us for, you know, for the
fee to move you up. And you have to kind
of not lose your mind right there, because you're looking
at your supply house saying, why couldn't you move me up?
Are you not? You don't have the capabilities, you don't
(14:19):
have the buying power. For what reason can you not
get this faster? Why do I have to go through
this alternate path to go somewhere else? And you know,
it's really just a buying power thing, you know. And
so this is kind of assessing the problem. So I've
spent thirty days figuring out what the problem was. I
feel like I've at least come to some version of
a conclusion of what this is. And I don't. Look,
(14:41):
I'm not some end all expert. I have no idea.
I went to you know, college, and I studied finance.
I didn't studied electrical supply chains. So nor do I
totally understand how electrical systems work. I just know that
I have a building, you know, that's burning, and I've
got a lot of interest carry every month, and so
now I'm trying to come up with all t solutions
for how to get my electrical insight.
Speaker 1 (15:03):
Part of me is amazed that it's now twenty twenty
four and we are still talking about shortages that are
this impactful. So, Joe, I remember when we spoke about,
you know, residential real estate. We would talk about the
idea that maybe there's like a sink missing or something
in twenty twenty one or even early twenty twenty two.
(15:24):
But it is the persistence of this particular shortage is
kind of mind blowing.
Speaker 2 (15:30):
Yeah.
Speaker 3 (15:30):
I mean, I imagine when you were building buildings like
in twenty twenty one, I assume, like many others, you
had multiple shortages of things like is that the case?
Like was there a time when, like, you know, like
everything was in scarcity for you. Yeah, and then what
like so do any of these people that you get
on the calls like have an exploration for why this
(15:52):
particular supply chain hasn't caught up?
Speaker 2 (15:55):
Not not really great And so that's had to I
think I've had to really do a lot of homework
in other areas to figure out what the problem is.
But when you start to think through it logically, it
does start to make sense. I mean, think about the
amount of electrical vehicle charging stations that have come into
the country just over the last couple of years here,
(16:17):
think about the amount of data centers that are going in.
Think about what the amount of energy requirement has increased
just with the invention of you know, like chat, GPT
for example, right and AI, And think about all of
that is requiring power. You have solar farms going in
left and right. I mean, all of this stuff ultimately
(16:38):
all has electrical components, and there are five major manufacturers
that produce all the electrical components. And so I think
it literally is just a product through the system problem.
And I think to totally understand that, you would probably
need to get somebody you know on the pod here
from one of those manufacturers by the.
Speaker 3 (16:57):
Way, Tracy, you know obviously we touched on some of
the stuff recently with our episode with Steve Eisman, like
some of these like old school industrial players that have
went to the moon. I just looked up Eaton, which
I don't think had come up on a previous episode
is one of the names we talked about. That is
another stock that basically.
Speaker 4 (17:14):
Looks like in Vidia right now when you look at it.
Speaker 3 (17:17):
Here is this like sleepy stock from a few years
ago and then now in this great electric era of
electrification that is like another stock disc gone absolutely to
the moon.
Speaker 1 (17:26):
It is truly remarkable that there are those sort of
old school companies out there. I mean, Tractor Supply is
another one. But these businesses in the business of doing
these old fashioned things that look like semiconductor stock charts.
Speaker 3 (17:40):
Yeah, it's it's really remarkable. So Chris, you posted on Twitter,
You're like, someone just goes start a electrical components factory
in Mexico.
Speaker 4 (17:48):
You get upset up?
Speaker 3 (17:49):
Did anyone take you up on that offer? Is something
going to get built to expand this capacity that you
know of?
Speaker 2 (17:55):
There are a number of people that are trying to
figure it out, I would you know, the obvious statement
here is that when Siemens is one of the companies
that you're competing against or I mean, I don't know,
you've got the stocks in there. I'm not sure what
the market cap is on Eaton. None of these are
small companies, right, so I think there's pretty good fear
from those that are in the manufacturing space that they're.
Speaker 4 (18:17):
That's what Eaton is asked about.
Speaker 2 (18:18):
How do we actually Eaton.
Speaker 3 (18:20):
Is one hundred and thirty nine billion dollar company? Now,
oh no, no, sorry, Siemens is one hundred and thirty nine
billion dollar company. Eton is just a oh yeah, it's
one hundred and twenty five billion dollar Yeah. So these
are massive company as we're talking about, right.
Speaker 2 (18:32):
So the concept that you're just going to walk out,
you know, and grab a pe firm that's worth you know,
twenty thirty billion dollars ago just compete head to head
against these companies is a little bit intimidating. I'm sure.
What is interesting is the reason I reference Mexico is
because one of the possible solutions that's come forward here
on our building and one of the paths I'm actually
(18:53):
going down is we have a friend that runs some
factories and wars and I got on the phone with
his engineer that runs his five factories. They have like
six or seven thousand employees, whole bunch of people that
work for him there, and so these are very large facilities.
I got on with his engineer, and his engineer reached
out to his electrician and we have actually sourced the
exact same semen spect item that's going to come from
(19:18):
a Mexican supply house that is supposed to deliver in
eight weeks from today.
Speaker 3 (19:22):
Oh well, this is like I was, this was going
to be my concluding thought, which is that in any
business a delay is awful and costly. But it feels
like when interest rates are as high as they are
right now, it just sort of compounds the crisis. And so,
like you know, obviously eight weeks versus year is always
(19:42):
going to be like a massive difference for anyone in business,
but with interest rates high, it really is striking the
degree to which these sort of like supply chain constraints
and high interest rates are like these like interlocking problems
that compound each other.
Speaker 2 (19:56):
Yeah, my concern is I have no idea if this
is gonna show up weeks, you know, So here you are,
you know, you're setting off a wire for a substantial
deposit for these units, and you have no idea if
this is going to show up any faster. Right At
one point I was told twelve months, and then we
got to eleven and a half months, and then I
was told maybe twelve more months, could be longer, don't know,
(20:19):
And so you know, it's just such an unknown world.
One of the other things that's causing some constraints on
the supply as well. So you know, Tracey, you asked
the question about what's causing the problem, Well, the factories
is just a throughput issue, I think. But then on
top of that, you have a number of tenants that
have identified that this is a big problem. And so
if you're in hyper expansion, you know, we started talking
(20:41):
about Dutch Bros. If you're in hyper expansion, it's the
same switch gear to build the Dutch Bros. Whether you're
in Arkansas or Florida, or Texas or Utah or wherever
else you are. So companies like that are going out
and buying fifty and one hundred switch gears at a time,
and then they basically what they do is they sell
me as the developer a switch gear when we're ready
for the switch gear.
Speaker 1 (21:02):
It's crazy that you have to switch gears because of
the switchcars.
Speaker 2 (21:09):
Yes, exactly. And then then there's this whole other world.
There's this whole other world of people, and these are
a lot of the man's players, for sure. There's this
whole other world of electricians that have seen this problem
coming down the line here, and what they've been doing
now is basically buying parts opportunistically over the last twenty
four months. And so my switch gear in West Valley
(21:31):
is sixty two thousand dollars. That's what it costs me
to order it through from Siemens, and then there's markup
to the supply house and everybody else involved. But the
actual unit cost sixty two grand. So that unit I
have been getting quoted. There are people who are building
these and they're kind of Frankenstein switchgearboards because they're basically
piecing anything together they can find to make it work,
(21:54):
and they're piecing those together and you can usually get
the power companies sign off on them. The cheapest I've
seen out of those those folks is three x so
three times my cost.
Speaker 3 (22:04):
Well, I hope you get your switch gear in eight
weeks from now.
Speaker 1 (22:08):
Switch Gear and gear.
Speaker 3 (22:10):
Us keep us updated on the journey.
Speaker 1 (22:17):
Lots More is produced by Carmen Rodriguez and dash El Bennett,
with help from Moses Ondom and Cal Brooks.
Speaker 3 (22:23):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (22:28):
Please rate, review, and subscribe to Odd, Lots and lots
More on your favorite podcast platforms.
Speaker 3 (22:34):
And remember that Bloomberg subscribers can listen to all of
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Speaker 4 (22:40):
Thanks for listening.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
What's up?
Speaker 3 (00:10):
Chris's Joe?
Speaker 2 (00:11):
Hi? How are you today? Hey Chris?
Speaker 1 (00:13):
How's it going? By?
Speaker 2 (00:14):
Tracy? How are you today?
Speaker 1 (00:15):
I'm good? Thank you. I'm sorry we kept you waiting.
I saw your tweet, No problem whatsoever.
Speaker 2 (00:21):
I was just giving you guys a hard time.
Speaker 3 (00:22):
So Tracy, we're back with our favorite Dutch bros. Brow
the brow of the Brow of Dutch Bros.
Speaker 4 (00:34):
I did a deadlift one two, Jimmy, Okay, what's.
Speaker 2 (00:41):
Uh?
Speaker 1 (00:41):
Marges?
Speaker 3 (00:42):
This isn't After School Special, except.
Speaker 1 (00:43):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve in the US.
Speaker 4 (00:49):
Where's the best with imposta?
Speaker 1 (00:51):
These are the important question? Is it robots taking over
the world?
Speaker 2 (00:54):
No?
Speaker 3 (00:54):
I think that like in a couple of years, the
AI will do a really good job of making the
Odd Lots podcast and people Today, I don't really need
to listen to Joe and Tracy anymore.
Speaker 4 (01:05):
We do have.
Speaker 3 (01:07):
The perfect welcome to lots More where we catch up
with friends about what's going on.
Speaker 1 (01:13):
Right now, because even when Odd Lots is over, there's
always lots More.
Speaker 3 (01:18):
And we really do have the perfect guest, Chris Hatch.
We talked to him several weeks ago about opening up
drive throughs. But Chris, what are you up to these days?
Speaker 2 (01:30):
Yeah, just continue to try and build buildings and figure
out how to get some of the stuff out of
the ground and get these projects built and constructed. It
seems like it just grows harder every day, more and
more challenges.
Speaker 3 (01:44):
So yeah, So, Tracy, We've talked about like almost every
supply chain crisis under the sun over the last three years.
But there's one thing it's been in shortage for forty
two straight months according to the ISM, and that is
electrical transformers and parts. We've never talked about that.
Speaker 1 (01:59):
You finally get to do your Transformer episode.
Speaker 2 (02:02):
Chris, what's your Transformer in the electrical Sorry, I guess
I have a six year old son and you talk
about Optimus Prime.
Speaker 4 (02:09):
Yeah, yeah, or basically not.
Speaker 2 (02:12):
Stop at my household?
Speaker 1 (02:15):
Yeah, I know them.
Speaker 3 (02:16):
Well, what does it mean when you're trying to build
a new Starbucks or Dutch Bros. Location off the side
of a highway in Texas?
Speaker 2 (02:23):
Let's use Utah if that's okay, And mostly just because
it's easier. There's less power companies in Utah. So starting
with Rocky Mountain Power, who supplies the power for probably
eighty percent of the state of Utah. There are a
few cities that have the power company. There's a different
power company Southern Utah. You have kind of the main grid,
So think of that as like, you know, basically the
main power supply that's going into a huge city. And
(02:46):
so once you come off of the grid, the first
place the electric comes to is a transformer that sits
on your site. And the easiest way to think of
it is this is kind of it's a green typically
or blue or some kind of kind of darker landscape
colored cabinet that sits in the landscaping area somewhere. It's
usually two or three feet tall, maybe sometimes four or
(03:07):
five feet tall, about three or four feet square, and
that's where the power comes in from the power grid
to your site. So that is transfer. Got it.
Speaker 1 (03:17):
So Joe finally gets his transformer episode. I think he's
been tweeting like religiously every time the ISM survey comes
out where they're talking about the shortage. But is it
at all common for transformers to go through periods of
scarcity or has what we've seen over the past couple
(03:37):
of years now been unusual.
Speaker 2 (03:39):
Yeah, that's a great question. Definitely, during the kind of
over the last four years, let's just call it kind
of the post COVID world, we've definitely seen some real
strains on the supply of transformers into the world. At
the moment, with at least the type of buildings that
I'm building, the transformers actually aren't the longest lead supply item,
So that's the first step of where the power comes
(04:02):
off of the line, and it's actually the switch gear
that's the problem right now today is that there's these
massive delays with switch gear that are going in the
United States right now.
Speaker 3 (04:12):
What's switch gear?
Speaker 2 (04:14):
So power comes in from the grid to the transformer,
from the transformer to the meter, which makes sense, that's
that's what the power company comes and reads to determine
how much power you use in a month, and then
from the meter it goes to the switch gear. The
switch gear is where the power comes to your building.
So this is usually cabinatry that sits flush or on
the back of the building or one of the sides
(04:35):
of the building most of the time. And that is
in the example that I've got of a building that
we are done building the building in West Valley City, Utah.
I need a sixteen hundred amp switch gear piece so
that electrical supply is enough to power sixteen hundred amps
going into the building. So from the switch gear, then
(04:58):
the power gets distributed to the pan in each individual
tenant space.
Speaker 1 (05:02):
Wait, so when we say there's a shortage of transformers
or switch gears or whatever, what do we actually mean
here is that you can't get them. So the problem
is your lead times expand, or the problem is there
are enough of them to satisfy demand, and so prices
go up, maybe to a prohibitive point.
Speaker 2 (05:24):
Maybe To start with my specific example, I originally ordered
my switch gear a year ago, April of twenty twenty three.
I was told that there was a one year lead time,
which felt like an exorbitantly long time. That's longer than
you know, the lead times kind of we're building over
the last three or four years. But that was the
longest we had heard up to that point. So we
(05:49):
set a schedule with my contractor to have the building
more or less complete right in April of twenty twenty four,
so that the switch gear would then arrive and we
could power up the building and then the tenants could
step in and do their individual build out. The problem
is that four weeks ago, for the first time, the
supply house called my electrician, who called my general contractor,
(06:10):
who called me and said it might be up to
one more year.
Speaker 4 (06:16):
What does that cost you? Yeah, because you have to
finance this.
Speaker 3 (06:19):
So it's like, you, could you tell us what's being
built here? Is it another Dutch Bros. Or a Starbucks
or something.
Speaker 2 (06:26):
It's a great question. This is a four tenant building.
It's all restaurants. Cafe Rio is a Mexican grill with
a drive through, Marcos, Pizza, Chip which is a cookie company,
and Jersey Mikes.
Speaker 3 (06:37):
So what happens when your general contractor or whoever it is,
gets the call from the electrician like, okay, you got
to wait another year.
Speaker 2 (06:47):
You don't just drive to home depot and buy one
of these parts. They don't exist. So you really have
not a lot of great options at that point. And
so it's been interesting because most of the people that
are sitting in my seat as the developer have no
idea what to do. And I mean I have talked
to probably two or three hundred developers over the last
(07:09):
two months, you know, a month. As soon as this
problem became real, I've just started calling every peer I
know in the space anywhere trying to figure out how
I can solve the problem. And I would tell you
that at least half of the people I've talked to
are building buildings with a very similar power requirement to mine,
and they might they're not as far along in the
(07:30):
process as I am, and they're you know, kind of
content because they're like, well, we don't have that problem.
Our switch gear is supposed to be here on this day.
And as I've dove in further on, there is a
big problem. It's not just me. It's not some micro
issue for Chris Hatches building. This is a massive issue
that's impacting the whole you know, all of North America.
Speaker 1 (07:49):
Really there should be more switch gear sympathy in general.
But Okay, I get that this is incredibly frustrating for you,
and you know, waiting a whole year for something and
then being told that actually it's going to be another
year is kind of crazy. But in terms of the
actual financial impact, who does that fall on. Is it
(08:11):
you as the developer, or is it like the retailer
Dutch Brothers or whoever who might have preleased that space.
Speaker 2 (08:20):
Yeah, in this case, it is the developer that's going
to take the brunt of that impact. So it's the
developer being me and my investors that are in the building.
The good news is we built in a few line
items and contingency line items. You don't necessarily hope to
burn through all the contingency line items. And it's hard
for me to guess when the switch here is going
(08:41):
to arrive or when I'll be able to source it
through an alternate means. If I just look at the
one year out and we sit with this building. My contractor,
by the way, finished the entire building two fridays ago,
so they're done with the site. There's nothing left for
them to do on the building until the switch gear
gets here.
Speaker 3 (08:57):
So there's this whole complete building that would others be
totally ready for the Mexican restaurant and the pizza restaurant,
et cetera to move into. And the one thing that's
preventing it is this part that could still take another year.
Speaker 2 (09:10):
Yes, and I mean we're just we're not doing anything
crazy here. We're trying to serve the world. You know,
tacos and pizza and cookies and sandwiches, right, you know,
And so if I just sit for one year, you know,
first off, I'm going to have to go extend my
loan with the bank for sure, because I don't think
I have a full year of time. But if they
allow me to continue on it more or less the
(09:32):
same terms I'm at today, my dead interest carry just
my just my interest expense for holding the building for
a year or one hundred and fifty eight thousand dollars.
Speaker 1 (09:41):
Wait, I still don't understand, like why do we have
the shortage again? Can you maybe expound on that a
little bit more? Like what is the bottleneck here? Exactly?
So okay, switch gears, sure, but like who is making
these things?
Speaker 4 (09:55):
Yeah?
Speaker 2 (09:57):
Sure? So if you think of it in terms, if
you start looking at it through first, how the contracting
typically works. A developer contracts with a general contractor when
he goes to decide to build a building, and the
contractor is going to build that building for them. The
contractor then signs up subcontractors, one of which is an electrician.
The electrician then signs up through a supply house an
(10:20):
order that's going to get filled. You know, and what
they're filling is whatever the developers, you know, electrical engineer
had specked for the building.
Speaker 1 (10:28):
Right.
Speaker 2 (10:28):
So in this case, it's this sixteen hundred and am
switch gear and then you know, my five panels that
I've ordered, and so he's ordering that through a supply
Here she was ordering that through a supply house, and
then occasionally a supply house orders through a larger regional
supply house, and then the regional supply house then orders
from the manufacturer. Right, So haldful steps, But that's kind
(10:49):
of how the contracting works.
Speaker 3 (10:50):
That was literally just the description that was this, you
just walked us through the supply chain.
Speaker 4 (10:55):
Okay, keep going, but that was fantastic, yeah, right.
Speaker 2 (10:58):
So the real of that exists here is that there's
more or less five big manufacturers of all of this
electrical gear. So whether you're talking about the panels, or
the transformers, or the metering equipment or the switch gear,
all of it, it's all coming more or less from
five big manufacturers. Semens, Eaten, Color, Hammer, Square D and
(11:19):
then GE sold off recently there unit a couple of
years ago, and I can't remember the subsidiary that they've
sold it to. But those five provide the electrical components.
Speaker 3 (11:42):
When your developer talks to the electrician, or the electrician
talks to the supply house, or the supply house talks
of the regional supply house, of the regional supply I
was talking to the manufacturing Did they give you a reason?
Do they say what's going on? Or do they explain why? Hey,
we told you it was going to be April twenty
twenty four, and now it's going to be April twenty two.
Speaker 4 (12:00):
Do they give you some sort of excuse?
Speaker 1 (12:02):
Or yeah? Can you can you call them up and complain?
Can you be like an electricity Karen or something like
what what do you do?
Speaker 2 (12:09):
Yeah, there's not much recourse. I mean, that's that's the downer.
It's an interesting world. And I don't know why it
is exactly. And and Joe, you and I were tweeting
about this or dming about this before the show. But
for whatever reason, anytime you deal in electrical electrical is
hand in hand with man'splaining. It doesn't matter what you do,
somebody's gonna man explain you how you're wrong. And so
(12:31):
even this podcast episode will come out and hundreds of
people will man explain, Dared say something or Tracy, Yeah.
Speaker 1 (12:38):
It just I'm sure man explain to me.
Speaker 2 (12:40):
I'm not.
Speaker 1 (12:41):
If a guy explains transformers to another guy doesn't count
as man explaining.
Speaker 4 (12:46):
Then it's just explaining.
Speaker 1 (12:48):
Explaining in a gender.
Speaker 3 (12:50):
What did I tell you?
Speaker 2 (12:50):
What?
Speaker 3 (12:51):
What's the what's the how do they man explain it to?
Speaker 2 (12:54):
Well? That's the interesting thing. It's it's you know. I
So I started calling through. I started with my electric
Then I went to my supply house, and I quickly
realized my supply house. We have two supply houses in
the state of Utah, and they're both too small for
the vast majority of their orders. They order through a
regional supply house. They don't order direct from the manufacturers,
(13:15):
and so that's not a very good position to be in.
And so I started I going to Twitter, I went
to LinkedIn, I went to colleagues. I started pushing this
message out and since then, I have spoken to somewhere
around one hundred people that have told me they have
a guy or they have somebody that can source the
materials that you know what I need the switch gear,
and I've been off phoe with them, and a lot
(13:36):
of those folks were the regional supply house contacts. And
here I had to try to not lose my cool
because multiple times I was talking to somebody the regional
supply house and my particular order is for Siemens switch gearboard,
and so the regional supply house person would talk to
me and say, well, give me your you know, give
me your spec send them all over to me. I'll
(13:57):
call the manufacturer, I'll find out where you are in
the order process, and then I'll call you back and
tell you if I can move you up, and then
what it will cost us for, you know, for the
fee to move you up. And you have to kind
of not lose your mind right there, because you're looking
at your supply house saying, why couldn't you move me up?
Are you not? You don't have the capabilities, you don't
(14:19):
have the buying power. For what reason can you not
get this faster? Why do I have to go through
this alternate path to go somewhere else? And you know,
it's really just a buying power thing, you know. And
so this is kind of assessing the problem. So I've
spent thirty days figuring out what the problem was. I
feel like I've at least come to some version of
a conclusion of what this is. And I don't. Look,
(14:41):
I'm not some end all expert. I have no idea.
I went to you know, college, and I studied finance.
I didn't studied electrical supply chains. So nor do I
totally understand how electrical systems work. I just know that
I have a building, you know, that's burning, and I've
got a lot of interest carry every month, and so
now I'm trying to come up with all t solutions
for how to get my electrical insight.
Speaker 1 (15:03):
Part of me is amazed that it's now twenty twenty
four and we are still talking about shortages that are
this impactful. So, Joe, I remember when we spoke about,
you know, residential real estate. We would talk about the
idea that maybe there's like a sink missing or something
in twenty twenty one or even early twenty twenty two.
(15:24):
But it is the persistence of this particular shortage is
kind of mind blowing.
Speaker 2 (15:30):
Yeah.
Speaker 3 (15:30):
I mean, I imagine when you were building buildings like
in twenty twenty one, I assume, like many others, you
had multiple shortages of things like is that the case?
Like was there a time when, like, you know, like
everything was in scarcity for you. Yeah, and then what
like so do any of these people that you get
on the calls like have an exploration for why this
(15:52):
particular supply chain hasn't caught up?
Speaker 2 (15:55):
Not not really great And so that's had to I
think I've had to really do a lot of homework
in other areas to figure out what the problem is.
But when you start to think through it logically, it
does start to make sense. I mean, think about the
amount of electrical vehicle charging stations that have come into
the country just over the last couple of years here,
(16:17):
think about the amount of data centers that are going in.
Think about what the amount of energy requirement has increased
just with the invention of you know, like chat, GPT
for example, right and AI, And think about all of
that is requiring power. You have solar farms going in
left and right. I mean, all of this stuff ultimately
(16:38):
all has electrical components, and there are five major manufacturers
that produce all the electrical components. And so I think
it literally is just a product through the system problem.
And I think to totally understand that, you would probably
need to get somebody you know on the pod here
from one of those manufacturers by the.
Speaker 3 (16:57):
Way, Tracy, you know obviously we touched on some of
the stuff recently with our episode with Steve Eisman, like
some of these like old school industrial players that have
went to the moon. I just looked up Eaton, which
I don't think had come up on a previous episode
is one of the names we talked about. That is
another stock that basically.
Speaker 4 (17:14):
Looks like in Vidia right now when you look at it.
Speaker 3 (17:17):
Here is this like sleepy stock from a few years
ago and then now in this great electric era of
electrification that is like another stock disc gone absolutely to
the moon.
Speaker 1 (17:26):
It is truly remarkable that there are those sort of
old school companies out there. I mean, Tractor Supply is
another one. But these businesses in the business of doing
these old fashioned things that look like semiconductor stock charts.
Speaker 3 (17:40):
Yeah, it's it's really remarkable. So Chris, you posted on Twitter,
You're like, someone just goes start a electrical components factory
in Mexico.
Speaker 4 (17:48):
You get upset up?
Speaker 3 (17:49):
Did anyone take you up on that offer? Is something
going to get built to expand this capacity that you
know of?
Speaker 2 (17:55):
There are a number of people that are trying to
figure it out, I would you know, the obvious statement
here is that when Siemens is one of the companies
that you're competing against or I mean, I don't know,
you've got the stocks in there. I'm not sure what
the market cap is on Eaton. None of these are
small companies, right, so I think there's pretty good fear
from those that are in the manufacturing space that they're.
Speaker 4 (18:17):
That's what Eaton is asked about.
Speaker 2 (18:18):
How do we actually Eaton.
Speaker 3 (18:20):
Is one hundred and thirty nine billion dollar company? Now,
oh no, no, sorry, Siemens is one hundred and thirty nine
billion dollar company. Eton is just a oh yeah, it's
one hundred and twenty five billion dollar Yeah. So these
are massive company as we're talking about, right.
Speaker 2 (18:32):
So the concept that you're just going to walk out,
you know, and grab a pe firm that's worth you know,
twenty thirty billion dollars ago just compete head to head
against these companies is a little bit intimidating. I'm sure.
What is interesting is the reason I reference Mexico is
because one of the possible solutions that's come forward here
on our building and one of the paths I'm actually
(18:53):
going down is we have a friend that runs some
factories and wars and I got on the phone with
his engineer that runs his five factories. They have like
six or seven thousand employees, whole bunch of people that
work for him there, and so these are very large facilities.
I got on with his engineer, and his engineer reached
out to his electrician and we have actually sourced the
exact same semen spect item that's going to come from
(19:18):
a Mexican supply house that is supposed to deliver in
eight weeks from today.
Speaker 3 (19:22):
Oh well, this is like I was, this was going
to be my concluding thought, which is that in any
business a delay is awful and costly. But it feels
like when interest rates are as high as they are
right now, it just sort of compounds the crisis. And so,
like you know, obviously eight weeks versus year is always
(19:42):
going to be like a massive difference for anyone in business,
but with interest rates high, it really is striking the
degree to which these sort of like supply chain constraints
and high interest rates are like these like interlocking problems
that compound each other.
Speaker 2 (19:56):
Yeah, my concern is I have no idea if this
is gonna show up weeks, you know, So here you are,
you know, you're setting off a wire for a substantial
deposit for these units, and you have no idea if
this is going to show up any faster. Right At
one point I was told twelve months, and then we
got to eleven and a half months, and then I
was told maybe twelve more months, could be longer, don't know,
(20:19):
And so you know, it's just such an unknown world.
One of the other things that's causing some constraints on
the supply as well. So you know, Tracey, you asked
the question about what's causing the problem, Well, the factories
is just a throughput issue, I think. But then on
top of that, you have a number of tenants that
have identified that this is a big problem. And so
if you're in hyper expansion, you know, we started talking
(20:41):
about Dutch Bros. If you're in hyper expansion, it's the
same switch gear to build the Dutch Bros. Whether you're
in Arkansas or Florida, or Texas or Utah or wherever
else you are. So companies like that are going out
and buying fifty and one hundred switch gears at a time,
and then they basically what they do is they sell
me as the developer a switch gear when we're ready
for the switch gear.
Speaker 1 (21:02):
It's crazy that you have to switch gears because of
the switchcars.
Speaker 2 (21:09):
Yes, exactly. And then then there's this whole other world.
There's this whole other world of people, and these are
a lot of the man's players, for sure. There's this
whole other world of electricians that have seen this problem
coming down the line here, and what they've been doing
now is basically buying parts opportunistically over the last twenty
four months. And so my switch gear in West Valley
(21:31):
is sixty two thousand dollars. That's what it costs me
to order it through from Siemens, and then there's markup
to the supply house and everybody else involved. But the
actual unit cost sixty two grand. So that unit I
have been getting quoted. There are people who are building
these and they're kind of Frankenstein switchgearboards because they're basically
piecing anything together they can find to make it work,
(21:54):
and they're piecing those together and you can usually get
the power companies sign off on them. The cheapest I've
seen out of those those folks is three x so
three times my cost.
Speaker 3 (22:04):
Well, I hope you get your switch gear in eight
weeks from now.
Speaker 1 (22:08):
Switch Gear and gear.
Speaker 3 (22:10):
Us keep us updated on the journey.
Speaker 1 (22:17):
Lots More is produced by Carmen Rodriguez and dash El Bennett,
with help from Moses Ondom and Cal Brooks.
Speaker 3 (22:23):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (22:28):
Please rate, review, and subscribe to Odd, Lots and lots
More on your favorite podcast platforms.
Speaker 3 (22:34):
And remember that Bloomberg subscribers can listen to all of
our podcasts add free by connecting through Apple Podcasts.
Speaker 4 (22:40):
Thanks for listening.
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