The monumental disruption of the supply chain seems to be at the forefront of every economic discussion, as the impact has been felt across all sectors, geographies and households. Accustomed to getting what we want, when we want it, we’ve been left wondering, how could this happen? Will things ever return to normal? And for those of us specializing in CRE, where can real estate help?
Untenable circumstances
The acceleration of e-commerce was well underway long before COVID-19. During the 2010s, especially after the conclusion of the Global Financial Crisis, e-commerce’s share of overall retail sales nearly tripled from 4.1% to 11.4%, increasing by an average of 20 basis points each quarter. Following the outset of the pandemic, that figure climbed 430 basis points to 15.7% during the second quarter of 2020 and has decelerated only slightly as the U.S. economy slowly reopened.
Up until the pandemic, logistics enhancements, such as port improvement projects and efficiency features in modern warehouses, kept supply chains humming along. However, when COVID-19 hit the U.S., the availability of labor, quite simply, couldn’t keep up with new shopping habits and consumer spending that has been aided by accumulated savings and federal stimulus packages. Near-term, brick-and-mortar stores that are able to adapt to this new environment will continue to represent the majority of retail sales, but there has been a massive socioeconomic shift in the way the U.S. population shops, and all affected constituents need to work together to ensure the sector evolves to meet future demand.
Industrial real estate developers have done their best to keep pace with the explosion of e-commerce, with property inventory growing substantially in just about every highly populated metropolitan area in the U.S. Additionally, creative alternative solutions are helping to restore order to the current disruption. For example, major retailers, some of which are chartering their own cargo ships, are stockpiling inventory ahead of what is anticipated to be a very busy holiday season, creating additional demand for warehousing and storage. Yet, with that, more workers are needed to handle packaging and distribution. As the most recent jobs report showed, there has been only modest employment increases, and while warehousing and transportation labor continues to increase steadily, it falls well short of what is required to keep pace with unprecedented growth within the sector.
Positive outcomes
Those with a vested interest in the resiliency and efficiency of the global supply chain recognize the past 18 months as more than a blip. The disruption we’ve experienced has uncovered where and how improvements need to be made – ultimately the path to creating a stronger, more efficient logistics landscape.
The continued worker shortage has compelled retailers and logistics firms to increase their adoption of automation, whether it be robotics for package handling or self-driving trucks to help deliver goods. While efforts on this front have been underway for some time, now there is an urgency that didn’t previously exist. It’s not simply a matter of saving on labor costs – it is a matter of getting the work done. Developers are doing their part by assessing new technological advancements to optimize building performance, and by offering floorplans and ceiling heights that drive greater efficiencies.
Global shipping gridlock and ballooning costs have also caused companies to seriously consider reshoring, or at least nearshoring to countries such as Mexico, where production operates at a fraction of the cost of China. These are big real estate decisions requiring a great deal of planning and analyses, but it’s prudent to have the discussions now. Realistically, it is not if, but when, another significant global event affects the U.S. economy.
While these technological and geographical changes may not have a significant impact on the 2021 holiday season, increased automation and reshoring are potential solutions to help ease some of the supply chain tensions, which may possibly last deep into 2022 if not carry into 2023.
Additionally, as with any crisis, every link in the supply chain is closely examining their operations. Are sources, vendors and routes adequately diversified? Is organizational strategy in line with available resources? As the Infrastructure Investment and Jobs Act and related bills move through Congress, the critical importance of effective supply chains will continue to be illuminated. This requires a new level of teamwork, and we’re ready for the challenge.
Matt Dolly is Research Director for Transwestern’s Strategic Account Management program. He delivers local and national commercial real estate and economic trends, analyses and reports to team members, clients, prospects and the media.
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• Joint Venture of PCCP and Transwestern to Build 173,400 SF Industrial Facility in Chicago
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• Midyear 2021 Elite 11 U.S. Industrial Markets Report
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