The global supply chain crisis looms large over the holiday season as a near-record backlog of cargo ships wait to unload thousands of containers outside the ports of Los Angeles and Long Beach. Consumers and businesses should expect continued disruptions and increased costs as it will take time for supply and demand to settle back into more predictable patterns. The pandemic and associated material and labor shortages exposed serious vulnerabilities in the just-in-time approach to inventory management. With an eye towards future geopolitical, climate and other black swan events, occupiers of industrial real estate are pivoting towards a new resilient supply chain strategy which will have profound impacts on property markets.

KEY IMPACTS ON PROPERTY MARKETS

1: Even more competition for space

More warehouse space will be needed to keep more goods on hand. While a push towards greater efficiency resulted in a 27% decrease in the U.S. retail inventories to sales ratio over the past five years, this trend is reversing as companies look to build resiliency through just-in-case inventory management. This shift will support continued robust absorption, further aggravating the existing shortage of warehouse space: vacancy in the U.S. currently averages 4.5% and is approaching 2.0% in Northern New Jersey and Southern California.

2: Tenants expanding into new markets

Occupiers will also be reevaluating their location strategies, including acquiring space in new markets. Diversifying the geography of facilities, including the onshoring of overseas manufacturing, can reduce reliance on specific ports and transportation networks to lessen supply chain risks. Sunbelt and Midwest cities with available land for development and proximity to key infrastructure such as rail, could benefit the most from this shift. A total of 68 metro areas across the U.S. and Canada are forecasted to see at least 10 million sf of new construction over the next five years.

3: Buildings designed for automation

To combat future labor market volatility, logistics firms will invest in automation, including robotics for package handling and driverless trucks. Buildings will need to have the proper specifications to accommodate this technology, including adequate clear heights as well as enhanced power. The average clear height for a new big box warehouse has already increased by more than 23% to 37 feet since 2000 and will only get higher as advancements in robotics allow tenants to take greater advantage of vertical storage.

As industrial space requirements evolve to achieve supply chain resiliency, there will also be an increased focus on Environmental, Social and Governance (ESG) factors. Real estate strategies incorporating site selection criteria to reduce transit distances and emissions as well as green building design features such as rooftop solar arrays will help occupiers move closer to achieving the complementary goals of sustainability and resiliency.

Sources: Institute for Supply Management, U.S. Census Bureau, Savills Research

Opinions expressed by the author are their own.