Supply of warehouse space has yet to meet demand

We have all been impacted in one way or another by disruptions to global supply chains, especially those of us operating in the commercial real estate industry sector. On paper, the industrial market is in an extremely strong position; vacancy rates are at record lows and rents have risen steadily across the board, with year-over-year spikes of more than 30% in some coastal port cities. Institutional money is flowing with no end in sight, users continue to fill existing space, and the appetite for new products has never been greater. This is a by-product of a global virus that has accelerated and pushed forward a significant amount of e-commerce demand, bringing a significant amount of warehouse demand with it. But this momentum is a double-edged sword. As strong as the desire for new products is, the very factors that contribute to this force also contribute to suppressing it.

The pandemic has revealed a significant amount of previously unknown or unforeseen risks for businesses around the world. When supply chains were disrupted, many companies were forced to watch helplessly as their product sat quietly in a steel box stacked halfway through space on a ship the size of a small country. . They were forced to make quick decisions to ensure their shelves were full and their customers were satisfied.

In a typical market cycle, this is perfectly normal dynamics, but when someone raises the fire alarm and every company floods the market at the same time, many just can’t compete to pay for the buildings. existing. Large companies, on the other hand, will always be better able to avoid major catastrophic shortfalls, as was proven when we saw record retail sales in the fourth quarter of 2021. It turns out that a large balance sheet and significant available cash allows such flexibility. (who knew) – like giving you the ability to buy prime real estate near ports, charter your own ships, use your own trucks, or pay for increased air cargo capacity. Either way, the desire and demand to store goods has grown exponentially.

The pandemic has revealed a significant amount of previously unknown or unforeseen risks for businesses around the world.

Strong industrial demand
The real theme of the current request is more of a – fool me once shame on you; fool me twice, shame on me – kind of thing. Businesses never want to be caught empty-handed (literally) again, and so advance ordering, bulk buying, and over-production will become all the rage during 2022. This will continue to extend safeguards further. and higher in the supply chain and maintain high industrial demand; this, of course, will only continue to contribute to the massive whiplash effect fanned by different governments around the world closing, reopening, closing again and reopening economies at different times and for different periods of time.

To the delight of large institutional landlords everywhere, space is downright unavailable and their buildings are all completely full – in fact, they could probably double the rents and their buildings would still be full (wink). For developers and construction companies across the country, this would sound like music to their ears as the next natural thing would be to build more. But these supply chain disruptions aren’t just affecting large consumer goods companies. As a service provider, they also affect your ability to confidently deliver projects on time and within budget, or at least with more variability than in the past.

Skyrocketing construction costs
The cost of building products has skyrocketed. For example, steel in some geographies has increased by more than 30-40%, and even steel availability is hard to come by (thanks Amazon). Also, even if you could have a product in place, the availability of labor is a complete unknown, and the skill level of that labor is now likely an even bigger unknown variable.

To the delight of large institutional landlords around the world, space is downright unavailable and their buildings are all completely full.
The world has once again proven to be an unpredictable, complex and fragile place. The whole momentum is out of whack, there is a massive imbalance in the market, and as I said above, the very factors that contribute to demand are also hindering supply. Companies may want more space so they don’t run out of product, but you can’t build the product because other companies don’t have enough of their products, and then that mismatch creates price variability that delays decisions , and around and around we go.

Port congestion
Luckily, we all know it won’t last forever. The queue of ships that line port cities across the country will normalize. Container stacks in transit areas from Los Angeles to Chicago to New Jersey will shrink and the US supply chain will continue to move forward. Commodity prices will level off, materials will arrive at job sites on time, project schedules and budgets will be met (for the most part), and someone somewhere will eventually lose their shirt by overcharging supply on a market and sat on an empty space for a couple of years. Business as usual – it is the lasting effects of this disruption that will be what to look for.

This desire for alternative ports, or alternative modes of transport, will coincide perfectly with the recent vote on the infrastructure bill.
For example, some companies may be taking the time to realize that they are too dependent on East Asian companies to manufacture their products. I think it’s safe to say that some companies may have overestimated their power or their ability to control what happens in those countries, which could ultimately lead to more offshoring or near offshoring of capacity. The new USMCA free trade agreement and Buy-American initiatives will support this strategy – watch out for states that support our neighbors to the south and north. Additionally, companies may find that they are too dependent on the ports of Los Angeles/Long Beach or NY/NJ and need to devise alternative strategies.

This desire for alternative ports, or alternative modes of transport, will coincide perfectly with the recent vote on the infrastructure bill. Increased investment to update these facilities will ultimately increase the capacity and operability of these hubs to better compete with the likes of Southern California and Northern New Jersey – keep a close eye on these places.

In sum
Nevertheless, the supply of space has not yet matched the demand and probably will not in the short term. Port cities will continue to be the preferred locations, especially those in key markets, but will continue to be dominated by larger companies that have the ability to afford them. Changing populations and changing demographics in each state will continue to upend the landscape, opening up opportunities in areas that may be lesser known. There will be winners and losers in the big supply chain shakeup, and it will be interesting to see what happens next.

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