By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions
LinkedIn
Interferences in the flow of goods from raw material through the entire manufacturing process to final delivery can produce distribution delays, higher costs, or merchandise shortages. These supply chain disruptions occur unexpectedly and affect industrial real estate demand as well. What are some of these common disruptions, the impact on industrial real estate demand, and strategies to mitigate the impact?
What are the common supply chain disruptions?
Natural Disasters: Weather-related calamities such as earthquakes, hurricanes, and floods disrupt every aspect of the supply chain. But, as we learned from COVID-19, unanticipated public health crises also play a role. The recent pandemic interrupted the supply chain by prompting factory shutdowns, labor shortages, transportation bottlenecks (initiated by port closures and transport slowdowns), demand shifts (hoarding of essential goods and decreased demand for nonessentials), border closures, and trade restrictions.
Geopolitical Events: Unexpected geopolitical events also disrupt the supply chain, such as military conflicts, trade restrictions, and tariff negotiations.
Labor, Economic, and Transportation Issues: Large-scale labor strikes and workforce shortages impact the normal flow of goods and materials. But economic issues play a role, too. Recent high inflation as well as currency volatility took a toll on supply chain health. Supplier failures, such as bankruptcies and quality issues, become disruptions, and port congestion and trucking shortages degrade the supply chain flow. As an example, in 2021, the container ship, Ever Given, ran aground, blocking the Suez Canal and obstructing traffic in a key shipping lane for six days.
Cyberattacks: Cyber thieves are learning to take advantage of the new developments in technology, such as artificial intelligence (AI), and pose threats to systems managing logistics and inventory.
These disruptions prompt increased lead times for parts and raw materials, higher costs, inventory shortages or surpluses, decreased customer satisfaction resulting in higher costs, and lower revenue and profitability.
What is the impact on industrial real estate demand?
Industrial real estate usage has evolved from the traditional convention focusing on warehousing and manufacturing to newer e-commerce and just-in-time delivery models. Businesses are also moving toward flexible, localized warehousing facilities. This trend, coupled with supply chain disruptions, impacts the industrial real estate market in several ways.
Increased Need for Warehouse Space: Lean, “just in time” inventories have given way to larger “just in case” safety stock as businesses recognize the impact of potential supply chain interruptions. Larger inventories require larger warehouses and distribution spaces.
- Mitigation Strategy: Businesses, too, are recognizing the need to diversify their supply chains, using multiple smaller facilities and expanding into secondary markets. To meet the growing need for warehouse space to support “just in case” inventories, investors should develop multi-tenant warehouses and accommodate flexible lease arrangements to handle inventory ebbs and flows.
Interest in Nearshoring and Reshoring: Covid-19, as well as geopolitical tensions, disrupted overseas deliveries, prompting many businesses to reshore their operations or build new facilities in the vicinity of their nearshore partners. This trend increased demand for manufacturing real estate facilities as well as the supporting logistics infrastructure.
- Mitigation Strategy: The demand for industrial real estate in domestic and nearshore locations is on the rise. Manufacturers should consider purchasing or leasing space near U.S. border regions or near major logistics hubs.
Hightened Demand for Resilient Spaces: The demand for Class A, modern facilities has increased as tenants look for higher ceiling heights to accommodate advancing automation capabilities, as well as spaces located near multiple modes of transportation. Tenants also look for lease agreements that allow them to scale up or down in response to the impact of potential supply chain disruptions.
- Mitigation Strategy: Developers should build or adapt existing facilities to support advances in manufacturing and distribution technologies. As mentioned earlier, tenants will also look for flexible leasing structures such as co-warehousing, on-demand solutions, or scalable space in modular industrial parks. (These parks use prefabricated modules built in factories and assembled on site. This approach offers several benefits, including enhanced flexibility for expansion.)
Pivot to “Last-Mile” Logistics: With the rise of e-commerce, consumers now enjoy and expect faster, even “same-day” delivery. Manufacturers are turning to “last-mile” logistics, locating their operations and distribution centers near major markets, often looking to locate these facilities in space-constrained cities.
- Mitigation Strategy: Develop facilities in dense metropolitan areas offering strong infrastructure. Consider renovating underutilized retail or office space into industrial space in these attractive urban areas.
Recent major supply chain disruptions have indeed affected industrial real estate demand. Companies choosing to mitigate these disruptions by developing or leasing new facilities and developers who plan to acquire industrial real estate should consider consulting with a proven real estate broker like Integrated Real Estate Solutions, offering real estate brokerage and consulting services to help businesses with all aspects of investing in industrial property.
Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs and put our success to work for you.
