A surge in domestic inventory could spur demand for U.S. logistics warehousing space as businesses reshore their overseas manufacturing and ongoing social distancing behavior by U.S. consumers continues to drive e-commerce demand, a report by real estate services giant CBRE (NYSE:CBRE) said Tuesday.
According to the Los Angeles-based firm, a 5% increase in business inventories would require an additional 400 million to 500 million square feet of capacity. CBRE did not state that such an increase in inventories would occur, although it acknowledged that it was feasible. Earlier this year, Prologis Inc. (NYSE:PLD), the world’s largest developer and manager of warehouses and distribution centers, projected a 5% to 10% rise in U.S. business inventories over the next five years as a result of supply chain changes wrought by the pandemic. This, in turn, could double the U.S. growth rate for logistics warehouse space, the company said.
In the U.S. alone, a 5% increase in business inventories could translate into 500 million to 700 million square feet of additional demand, Prologis said. As of March, the value of U.S. business inventories stood at $2.02 trillion, according to Commerce Department data.
For three decades, manufacturers and retailers have focused on making their supply chains as efficient as possible. Their “just-in-time” inventory management model combined low-cost production in far-flung locales like China with fast-cycle distribution such as airfreight to rush goods to market while holding minimal buffer stock. In the report, CBRE said the post-pandemic reckoning could bring that era to an end. The crisis has “underscored the fragility” of the JIT networks, which are now vulnerable to “closed facilities, ports and borders” due to the crisis. Many businesses are “planning major restructuring of their supply chain processes” due to the supply disruptions that have ensued, CBRE said.
The new model will likely be driven by resiliency, which ensures adequate product availability in the event of threats to a business’s supply chain continuity. This, in turn, will require more warehouse and distribution center space to store goods for deliveries to close-in markets, CBRE said.
In addition, the rising use of e-commerce is expected to create additional warehouse demand as social distancing continues even as states and cities reopen their economies, the firm said. “Established e-commerce hubs at major transportation centers should see strong fundamentals as many occupiers recalibrate their supply chains” to beef up their fulfillment and distribution networks, CBRE said.
Markets like Chicago and Dallas-Fort Worth are well positioned because of their central locations, CBRE said. Significant warehouse projects are already under construction in both markets. Dallas-Fort Worth was the top market for under-construction warehouse inventory during the first quarter, with 23.9 million square feet being erected, based on CBRE data. Chicago was fifth.
Inland hub markets are likely to be helped the most by the reshoring trend, in large part because markets located near U.S. seaports offer limited space, CBRE said. Inland hub markets likely to benefit include California’s Inland Empire; Atlanta; Memphis, Tennessee; Florida’s Interstate 4 corridor; Pennsylvania’s Interstate 78/81 corridor; Greenville, South Carolina; and California’s Central Valley, CBRE said.
The trends, if they materialize, could dramatically reinforce the bullish long-term theme for the logistics real estate industry. For nearly a decade, demand for warehouse and distribution center space has spiked due to secular growth in e-commerce fulfillment. Going into 2020, U.S. industrial warehouse vacancy rates were hovering at multidecade lows and asking rents were high, especially in coastal markets near major ports and airports.
If anything, government stay-at-home orders may increase the speed of e-commerce adoption as more consumers either begin to shop online or increase their activity. Given its value proposition, especially in the markets hardest hit by the pandemic, e-commerce is likely to become even more prominent in everyday life.
In years past, businesses were reluctant to hold inventories because of the burden of interest costs imposed on sitting inventory. However, with interest rates at or near zero, and in some cases in negative territory, that concern is far less of a factor, Prologis said.