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Firms across the G7 have invested heavily in building inventories (see graph 1) in response to major bottlenecks in supply, replacing a ‘just in time’ supply chain philosophy in response to both Covid-19 and supply chain difficulties with a ‘just-in-case’ one. This was largely predicated on the continued strength of consumer demand; strength which is now dissipating as households tighten budgets.
Based on the ratio of inventories to sales in major markets, there does not appear to be a significant inventory overhang at present. But it is rising fast (see graph 2), and as the economic outlook deteriorates, a sharp reversal in net inventory investment could derail the narrative around logistics occupier demand that has helped to attract global investors to the asset class, through what is known as the ‘bullwhip effect.’
Amazon’s plan to sublease space in the US after over-committing in recent years is a potential precursor for the bullwhip effect, illustrative of a tendency for occupiers to take on too much space to accommodate additional inventories that will soon be redundant in a fast changing economic environment (graph 2). In the UK for example, warehousing take-up hit a new record in the first half of the year, while in the US, some coastal areas have effectively sold out.
Some doom-mongers are saying Amazon’s announcement signals the beginning of an inflection point in occupier demand and a possible correction for the industrial investment market. However, the market is based on more than the retail industry, with warehouse space remaining in demand for data centres, urban farming, and re-shored manufacturing, among other uses. Online will remain a preferred method of commerce during the current downturn, given the cost advantage over physical retail, and vacancy rates are so low that markets should be able to accommodate any softening in occupier demand and keep rents rising in many territories.
The stockpiles of goods that have come about though reduced consumer spending in response to much higher inflation could also contribute towards a speedier solution to the latter. If businesses are forced into discounting products in order to get rid of excess stock, this will have a deflationary effect. If widespread enough, it may help offset the upwards pressures in the services sector, and contribute to bringing inflation down faster than originally expected.
Given that there are signs that some supply chain issues are improving – including falling shipping costs and an easing in survey-based indicators of delivery times – taken together there are glimmers of hope for the outlook of inflation.
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