Posted on January 25, 2022 · Posted in Industrial / Flex, Investments, Retail

We have been hearing all manner of discussions on the significance of the supply chain and the global crush caused by products stuck out in the ocean on shipping containers.

Industrial real estate was impacted since all of these products were bound to be delivered through the existing logistics supply chain to centers where they would filter down to other industrial storage centers and, finally, to the end users.

Michael J. Polk, previously wrote about how upon the outbreak of the pandemic, industrial properties were a class of real estate that wouldn’t be as affected. The question is, is the perceived safety of industrial real estate as a sacrosanct income stream the same as previously thought? When he wrote his last article, the issue and question was where was the income for the supplied products coming from? Never would he have imagined that the intricate, just-in-time supply chain would come under this amount of pressure. Is there something we are all missing to make sense out of this mess? It seems in many respects that the structure is broken and no one knows what to do about it.

What Should Or Can Be Done?

Start with the basics. The first step is to understand what is going on. It’s simple, but there are two things happening:

1. The supply chain is being disrupted by the virus.
2. The demand side is also being impacted by the virus.

In both cases, the disruption is causing a cascade effect. If you don’t know what is going on, how can you plan or react? Look at each case separately.

Supply Chain Disruption

First, take a look at the supply chain. As mentioned above, the supply chain is composed of multiple players who interact with each other. These include manufacturers, distributors, retailers, wholesalers and ultimately, consumers.

The interaction between them is complex. It is made even more complex by the fact that the product itself may be manufactured in different countries. For example, a car manufacturer might build their vehicle in China and ship it to the U.S. They then sell it to a distributor who sells it to a retailer who ships it to a consumer.

The consumer will buy the car and drive it around town until they get tired and trade it in or sell it. Today, of course, they may be better off keeping it since the price of new (and used) cars has increased due to manufacturer constraints on parts and delivery.

The Demand Side

Considering the stimulus provided by governments and pent-up demand, inflation has become a consideration along with supply constraints.

Consider the following from Joe Dunlap, managing director of the supply chain advisory of CBRE, who writes, “Warehouse operators today are confronting a dramatic increase in transportation costs.”

He goes on to list these rates increasing by as much as 250% for ocean freight, 40% to 50% for ground and 15% for air. These transportation costs cause direct increases in real estate as well, an area where warehouse space is already at a shortage. Not only industrial real estate, but even retail and office real estate are included here to some degree.

Final Takeaways

Despite supply chain issues, the usage of industrial real estate will remain positive as it is a high-demand and required sector. So some stability must be observed and buildings leased with a degree of surety in mind.

Still, industrial real estate landlords should ask pointed questions as to the effect disruption is having on new and current tenants. Gauge their responses and plan accordingly. Tenants should consider flexible warehousing and storage solutions if sales are a crapshoot to know.

The tenant has to have the materials and goods they vend in order to pay rent and salaries. The landlord needs the rent. Realistically considering whether you can do that with the current constraints is of utmost concern. Remember both the landlord and tenant make the whole thing work; work together if you can during these challenging times.

The supply chain is in dire straits at this time and has been for a while. In order to accurately value and utilize real estate, this factor of the economy is important to watch in the industry. When delving into or contracting for industrial or other business properties, keep the big picture in view and research your transactions accordingly.

 

Source: Forbes

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