The precise origins of the ongoing supply chain disruptions that have resulted in global product shortages across the board are still being debated, but one thing is abundantly clear: the challenges are not likely to be resolved anytime soon.
“The biggest question in 2022 is, ‘When is the supply chain going to return to normal?’” says Ben Hackett, founder of Hackett Associates, which provides trade consulting services to the international maritime industry as well as the National Retail Federation (NRF). “The current backlog and congestion is getting much better, and the supply chain is on its way to returning to normal—the new normal—but it could shift again by June or July once goods start flowing normally out of China again.” (At press time, the port city of Shanghai had been shut down due to a new outbreak of COVID-19).
A MULTI-PRONGED ISSUE
While many will point to the COVID-19 pandemic as the sole catalyst of the problem, there are a number of contributing factors, according to Robert Swinney, operations professor at Duke University’s Fuqua School of Business. “It’s not a single link that failed in a linear system,” Swinney said in a December 2021 webinar broadcast. “It is the response of a complex system to major changes in conditions. It appears to be a combination of complicated global supply networks and logistics processes that are being simultaneously strained at many different points.”
Swinney cites three major issues that led to the disruption: COVID creating a shortage of workers that reduced production capacity around the world, distortions to typical demand patterns due to changes in customer purchasing behavior (remember the panic-driven toilet paper shortage?), and the fact that manufacturing and logistics systems were often running at or near their maximum capacity even before the pandemic.
Because there was so little slack built into the global supply chain systems, the wide availability of vaccines that helped fuel the re-opening of the economy unleashed bottled-up consumer demand in the summer of 2021, and shortages, backlogs, and bottlenecks at the ports ensued—and persist today. One indicator of the severity of those shortages was that online consumers received 60 billion out-of-stock (OOS) messages between the two-year period from March 2020 to February 2022, according to a report by Adobe.
“Problems remain with clearing import containers to their inland destinations while export containers are still being held back due to lack of space at the terminals,” Hackett indicated in a March report released in partnership with the NRF. “Until supply chain problems are sorted out with more drivers, trucks, and inland storage space, we do not expect to see a rapid decline in the backlogs.”
IMPACT ON CRE INDUSTRIAL MARKET
From a commercial real estate perspective, the problems in the logistics ecosystem are compounded by the shift by occupiers of warehouse/distribution facilities from a just-in-time (JIT) inventory model—the practice of having just enough inventory on hand to fulfill orders—to a just-in-case (JIC) strategy that aims to minimize the probability that a product will sell out of stock. All of this has generated an unprecedented demand for warehouse/distribution space, with over 400 million square feet of industrial space anticipated to be absorbed in 2022, according to the NAIOP Research Foundation.
And while this has created massive headaches for the product distributors and consumers seeking their goods, it has created an enormous windfall for investors and owners of warehouse/distribution facilities, as well as the CRE industry as a whole. Average rents nationally for industrial properties soared to $8.82 per square foot in Q4 of 2021 and are expected to continue to rise, according to Newmark research. In turn, industrial sales volume reached a record $160 billion in 2021, besting the previous high in 2019 by 37.7%.
Read the full article in the Summer 2022 issue of SIOR Report out now!
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