Bottlenecks in Supply Chain and Effects on CRE

Since the start of COVID-19, an unprecedented disruption of the supply chain has rocked the United States and is still causing major problems today. The main problem began when China shut down, highlighting the dependence the US has had on Asia for manufacturing and imports. Even as imports stopped, online shopping and traffic increased greatly as people tried to stay home and avoid retail stores.

Pre-COVID, most distributers ran with a just-in-time inventory management system, only holing up to 14 days’ worth of inventory at a time. Due to increased shipping times, however, businesses are now shifting to a “safety stock” model, holding as much as 45 days’ worth of inventory at a time. This change has prompted much higher demand for industrial spaces, driving prices up and vacancies down. In the Inland Empire of California, vacancy reached as low as 0.6% in February of 2022. Additionally, the cost of shipping from Shanghai to the West coast has increased more than five times from 2020 to 2022. Due to this, industrial space around the two major US ports has become difficult to find, and companies are spreading out to areas such as Savannah, GA, Las Vegas, NV, and Phoenix, AZ. Due to the backup in its port, Savannah is implementing a program to provide a series of pop-up container yards to deal with the redirected traffic from the West coast.

Even so, the lack of warehouse space is putting pressure on the entire supply chain, and despite the push to build and develop, contractors cannot keep up with the demand. With a nationwide shortage of trucks and drivers caused by new trucking hours regulations, many companies are trying to bring their supply closer to the consumer, increasing the demand for space in many major cities. However, supplies for building new industrial spaces are increasing in cost regularly and are difficult to get in a timely manner. In order to mitigate this difficulty, there are some companies pushing to redevelop functionally obsolete buildings. During all these struggles, CRE investors are trying to find where the market will be anchored in future, but amid these problems, it is still uncertain.

This supply chain disaster is likely to permanently change the face of United States commercial real estate. Population shifts due to job changes and industrial and manufacturing increases will probably change investment opportunities in both large and small cities. Developers and construction companies will also most likely thrive from the lack of industrial buildings. Additionally, many retail stores are expected to close because of rising shipping and rent costs. Overall, all CRE investors should keep a close eye on the situation as it develops over the coming months.

Submitted by KJ Worley