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Creating Spatial Opportunities Out Of Chaos

Deal Center Business Services & Best Practices Industrial

This article also appeared in the Denver Business Journal | May 1, 2020

The growing threat of the coronavirus has created a serious risk to supply chains. Manufacturers and retailers face the possibility that suppliers will halt production, making it impossible to find alternatives and run-down stockpiles.

According to the March 2020 Logistics Manager’s Index Report, transportation prices are rising, inventory levels are fluctuating, and we can expect the coming month’s indices to continue to present an unbalanced picture. With demand spiking for staple goods and falling off for non-essential goods, essential-good warehouses are overburdened in some locations, leaving high vacancy in others. As a result of the pandemic, businesses need to revisit their real estate portfolio to support short-term changes while enabling a long-term supply chain strategy. This way, once this epidemic is under control, you are ahead of the game.

Many companies are diversifying sources from which they procure components or finished products to be less dependent on their Chinese production, but it’s a slow process. It takes time to rework logistics and transportation routes and build alternative fulfillment capabilities to accommodate the changes. Additionally, businesses must anticipate new movement restrictions.

The need for short- and long-term supply chain strategies

R.C. Myles, a member of the Society of Industrial Office Realtors (SIOR), and a principal with Myles Enterprises, Inc. in Denver said, “The impact of the Covid-19 crisis on commercial real estate can be compared to a 100-year event. In a situation like this, companies are trying to determine their plans for the near and long term, both of which are uncertain.”

“Many occupiers of industrial properties will weather this storm better than most other property sectors, but there will be industries that occupy warehouse space that are negatively affected, including construction, automotive, oil and gas to name a few. The bright spot for investors with dry powder, is that this crisis could present one of the best buying opportunities seen in decades,” explained Myles.

Let’s face it — when the pandemic ends the problem won’t. A return to normalcy would still see a surge of container movements creating a requirement for additional de-stuffing capacity. Most sectors are already feeling an impact. There's the pharmaceutical industry, where China supplies many drug precursors, as well as the fashion industry, where production for the autumn fashion season should be ramping up but is currently at a standstill. Also, any industry dependent upon electronic components has been impacted as we saw with Apple and Samsung delaying the delivery of their mobile phones to consumers. There are already concerns over goods for the Christmas 2020 market.

Production isn’t the only issue — shipping is also affected. There are already reports of backlogs building on the Yangtze River. Airfreight out of China is down. Ship operators are unwilling to visit Chinese ports thanks to the prospect of a viral outbreak on a large, but minimally manned container vessel. Avoiding China also reduces service to intermediate ports, such as Singapore. Meanwhile, empty containers are stranded in the wrong locations.

More ways to mitigate the risks of disruption

Businesses are doing what they can to mitigate the risks of disruption. It’s too late to start stockpiling Chinese goods. But businesses can load orders onto alternative suppliers particularly where many of these suppliers are in other far eastern countries that could be at greater risk from the virus, while having similar stocks held up from port issues. Nonetheless, even sources closer to home cannot be considered secure. Companies may consider bringing forward orders even from suppliers in currently unaffected areas before global prices rise. Conversely, buyers of goods whose prices are largely determined by metal and other markets may see opportunities to exploit depressed commodity prices.

This also leads to stockpiling unfinished products in assembling plants while waiting for overseas components. A manufacturer whose production is slowed or halted by the absence of, perhaps, just one component, still has other parts coming in. These parts will have to be stored and security will be an issue.

There is little doubt there will be another “cliff-edge” event at the end of the year — such as the presidential election — that will impact import-export strategies due to trade regulatory changes. The likelihood that stocks will build up at different distribution points in their supply chains will add pressure to the one- to two-day delivery commitment, so it is only sensible to start scoping out contingency arrangements. However, warehouse space in the ‘“last-mile delivery’” zone is already at a historical low for many densely populated cities, such as New York and Los Angeles.

According to Matt Trone, Denver-based SIOR member and managing director for industrial sales and leasing with Cushman and Wakefield, “Tenant demand for industrial space has declined in recent weeks apart from e-commerce and grocery industries.” Trone continued, “Current construction projects continue to move forward, but we anticipate several of the planned projects to press the pause button until stay-at-home orders are loosened and the economy stabilizes. Obtaining building permits is also challenging due to restrictions on staffing at various municipalities. However, there is a collective sense of optimism among industrial real estate professionals for Covid-19’s long-term impact on behavioral changes; more resiliency in supply chains which equates to higher inventories and demand for industrial real estate.”

The coronavirus epidemic is threatening a logistical and transportation slowdown. It’s too early to quantify impacts on production but devising back-up plans is a must and we can expect temporary supplier shifts to become permanent. Companies must evaluate current warehouse and fulfillment spaces and make decisive changes while expecting some of these temporary stopgaps to become permanent. Good real estate planning will allow businesses to be flexible in moving operations in such times of crisis.

Adam Petrillo

Adam Petrillo

Senior Managing Director, Head of Industrial Services, Savills
Adam is head of the Industrial Services for Savills, spearheading its strategic direction, leading a dedicated in-house team for advisory and transactions providing integrated consulting and brokerage services to some of the largest industrial companies in the world impacting their supply chain operations, logistics, warehouse, distribution and manufacturing real estate in North America.