How Do Supply Chain Issues Impact Industrial CRE?
Transportation costs are rising while timelines get longer. How do logistics issues affect your industrial property?
It’s been all over the news for months — there are major bottlenecks in our supply chains, and as a result, we’re in trouble. While things have improved in the past few months, challenges remain. The improvements may only be temporary, The Wall Street Journal reported. Even in the current lull, prices are rising, shipping times are increasing, and some products simply aren’t available any longer.
Let’s look at the impacts on industrial commercial real estate.
More Storage Space Is Needed
Before the upheaval of 2020, just-in-time inventory management was the name of the game. Distributors and manufacturers rarely ordered products or materials beyond their short-term needs. This works when goods are moving, but bottlenecks at U.S. ports forced ships to often wait weeks to unload cargo.
Many companies changed tactics, stockpiling extra material to deliver goods faster. The result? Tenants began to need more space, driving vacancy in major markets to the lowest point in history. The Inland Empire’s industrial market, for example, hit a vacancy rate of only 0.6% in February this year. With less space available, industrial rents in major markets near container ports soared.
Logistics Development Activity Peaks
Industrial developers responded to the need for more space. In April, nearly 600 million square feet was underway across the country, according to CommercialSearch. These developments include build-to-suit and speculative projects.
Some markets have an issue with land availability — particularly those near major ports. Los Angeles, along with its neighbor the Inland Empire, are running out of space to build, in large part. Northern New Jersey’s industrial market faces the same problem. As a result, rents are rapidly climbing in all three of these areas.
Rising rents have forced many industrial tenants to look inland for expansion plans. The Las Vegas and Phoenix markets have seen a notable increase in activity, for example. While Vegas may not traditionally be an industrial market, demand exploded last year. Phoenix also continues to excel, propelled by tenants shifts from Southern California.
Industrial Real Estate Prices Rise
This has had knock-on effects on existing assets, pushing sale prices higher. Lee & Associates reports investor activity is increasing, with $36 billion in deals closed for the year ending in September. Prices rose 15% during the same time. This growth will continue, particularly in markets with major vacancy pressures.
Inside of a truck cabin. Image by Jason Mitrione from Unsplash.
Labor Shortages Impact Property Operations
These shifts will not vanish overnight. The industrial sector appears well poised to keep growing at a rapid pace. It’s unlikely that bottlenecks will disappear while severe workforce shortages remain. Labor shortages impact every facet of shipping and logistics.
It’s no secret that there’s a widespread shortage of truck drivers and warehouse personnel. This problem extends beyond distributors, also impacting manufacturers and assemblers. The National Association of Manufacturers anticipates that, due to skilled labor shortages, 2.1 million manufacturing jobs could remain unfilled by 2030.
Related Questions
What are the most common supply chain issues that affect industrial real estate?
The most common supply chain issues that affect industrial real estate are transportation costs, public infrastructure improvements, and last-mile distribution space. Transportation costs tend to outweigh storage costs, so having a warehouse close to a highway or other transportation hub is important. Public infrastructure improvements can also drive value, as they improve access to and from the property. Lastly, last-mile distribution space has seen a spike in demand in recent years, as it is often a cheaper option for tenants compared to renting one large space in a mega warehouse outside a city. Source 1, Source 2.
How can industrial real estate owners mitigate supply chain risks?
Industrial real estate owners can mitigate supply chain risks by ensuring their properties are located close to highways and other public infrastructure improvements, as well as by investing in modern distribution space that is in high demand. Additionally, they can consider investing in niche types of distribution centers, such as cold storage facilities, industrial research labs, and pharmaceutical storage facilities, although these types of assets require experienced property managers and a specialized assessment of any potential investment opportunity. Picking the Right Industrial Investment and What to Know Before Making Your 1st Industrial Property Investment provide more information on mitigating supply chain risks.
What are the potential financial impacts of supply chain disruptions on industrial real estate?
Supply chain disruptions can have a significant impact on industrial real estate. According to JLL Research, the pandemic has caused a shift in consumer behavior, leading to a surge in e-commerce and a corresponding increase in demand for industrial real estate. This has resulted in a decrease in vacancy rates and an increase in rental rates.
However, supply chain disruptions can also lead to a decrease in demand for industrial real estate. For example, if a company is unable to source materials or components due to supply chain disruptions, it may need to reduce its production, leading to a decrease in demand for industrial real estate. Additionally, supply chain disruptions can lead to higher costs for companies, which can reduce their ability to invest in industrial real estate.
When considering investing in industrial real estate, it is important to consider the potential impacts of supply chain disruptions. To mitigate the risks associated with supply chain disruptions, investors should consider diversifying their investments across different industrial sectors and regions. Additionally, investors should consider the availability of financing options, such as industrial property loans, to ensure they have access to the capital they need to make their investments.
What strategies can industrial real estate owners use to reduce supply chain risks?
Industrial real estate owners can reduce supply chain risks by considering the location of their property. It is important to consider how close the property is to a highway, as well as any public infrastructure improvements that may be underway in the metro area. Additionally, industrial investors should consider the potential of smaller warehouses in a major metropolitan area, as this could be a cheaper option for tenants compared to renting one large space outside of the city. Lastly, investors should diversify their property types, consider alternative investments, review their debt structure, and increase their cash reserves to prepare for a recession. Source 1 and Source 2.
How can industrial real estate owners prepare for potential supply chain disruptions?
Industrial real estate owners can prepare for potential supply chain disruptions by diversifying their property types, considering alternative investments, reviewing their debt structure, and increasing their cash reserves. This will help ensure that their business is better positioned to weather any economic storms that may come their way.
Diversifying property types can help industrial real estate owners spread their risk across different markets and asset classes. This can include investing in different types of industrial properties, such as warehouses, distribution centers, and manufacturing facilities. Additionally, they can consider alternative investments, such as private equity, venture capital, and real estate crowdfunding, to further diversify their portfolio.
Industrial real estate owners should also review their debt structure to ensure that they are not overextended. This includes assessing their current debt load and making sure that they are not taking on too much risk. Additionally, they should consider increasing their cash reserves to ensure that they have enough liquidity to cover any potential disruptions in the supply chain.
By taking these steps, industrial real estate owners can better prepare for potential supply chain disruptions and ensure that their business is better positioned to weather any economic storms that may come their way.
What are the best practices for industrial real estate owners to manage supply chain risks?
Industrial real estate owners should take a proactive approach to managing supply chain risks. This includes understanding the potential risks associated with their particular industry, such as changes in demand, supply chain disruptions, and other external factors. Additionally, owners should consider implementing strategies such as diversifying their supply chain, using technology to monitor and manage supply chain risks, and developing contingency plans in case of disruptions.
For more information on best practices for industrial real estate owners to manage supply chain risks, check out this article from JLL.