Supply chain restructuring could lead to increased industrial real estate demand, says CBRE

A new report recently released by Los Angeles-based industrial real estate firm CBRE said that the need for supply chain restructuring, due to a what it called a response to the COVID-19 pandemic, could lead to new practices which could drive further demand for industrial United States-based industrial distribution space.

The CBRE report, entitled “Distribution Hubs Will Benefit from Increased Business Inventories & Supply Chain Restructuring,” said there could be a need for an additional 400 million-to-500 million square feet of industrial real estate space. That tally, according to CBRE Research, would be the rough equivalent of a 5% increase in business inventories.

“As the U.S. economy restarts, adjustments to business supply chains will increase the demand for warehouse space,” the report stated. “The downward trend in inventory-to-sales ratios since the early 1990s could reverse as manufacturers, wholesalers and retailers store materials and products closer to manufacturing centers and consumers.”

What’s more, the firm added that increasing e-commerce usage is expected to lead to additional demand for warehousing, as consumers continue to practice social distancing, at a time when states and cities are taking steps to re-open their economies. And it added that established e-commerce hubs at major transportation centers are expected to see strong fundamentals, with occupiers taking steps to recalibrate supply chains and also build automation and efficiencies into their respective distribution networks.  This is also being driven by supply chain disruption, in the form on transportation restrictions related to COVID-19, that have resulted in closed ports and borders due to shelter-in-place and congestion as things open back up, according to Matt Walaszek, CBRE Associate Director of Industrial Research.

The firm said that these steps include things like shippers upping inventories in order to be closer to both consumer and manufacturing locations that, it said, will spur industrial product demand.

Other possible options, it noted, include increasing near-shoring or re-shoring production, with an eye on building up a stronger domestic supply chain. This would benefit inland hubs—in locales like Inland Empire, Atlanta, PA I-78/81 Corridor, FL I-4 Corridor, Memphis, Greenville, and Central Valley, CA— more so than U.S.-based seaports, which CBRE said would be “targets” but are currently hindered by tight inventories.

CBRE’s Walaszek said that the idea of businesses upping inventory levels to be closer to consumers and manufacturing locations is something that is currently being considered as a viable strategy going forward.

“It’s not something that would show up in the data yet, but companies will be making decisions regarding their inventory levels which will impact the demand for industrial space over the medium-to-long term,” he said.

As for the possibility of how likely, or realistic, it is for business to increase their re-shoring or near-shoring production to develop a stronger domestic supply chain, Walaszek said that it is by no means an easy or fleeting decision.

“Rising labor costs in China and ongoing trade conflicts have prompted many global manufacturers to diversify supply chains throughout Asia in a multi-country strategy,” he said. “As a result of the COVID-19 pandemic, global occupiers with an over-dependence in one country or region may reassess their sourcing and manufacturing strategies. For some, this translates into diversifying their sourcing and manufacturing within each region (e.g. an Americas manufacturing hub). Notwithstanding, a widespread exodus of manufacturing capacity from China is unlikely given the sophistication of the industry, the maturity of the supply chain and China’s massive domestic consumption market. There is no doubt that the number of small manufacturers in the Americas will grow significantly, however, the volume produced from China and broader Asia will likely remain dominant.”