COVID-19 scrambles the logistics industry … in favor of logistics

The greatest health crisis in a century is going to lead to more inventory, according to a leading commercial real estate brokerage.

One of the world’s largest commercial real estate brokerages is predicting an increase in industrial inventory in the United States during the next five to seven years, an increase so large that an extra 400 to 500 million square feet of warehouse-distribution space will be needed to accommodate it.

The reason? COVID-19.

The virus that has taken the lives of close to 400,000 people worldwide, and wreaked havoc on the global economy, has already started to bring that inventory increase about, according to a report released in May by CBRE.

Some of that extra inventory will land in the Inland Empire, a market already familiar with logistical space. The two-county region, sometimes called the warehouse of the western United States, has approximately 600 million square feet of industrial space, and 21.4 million square feet was under construction during the first quarter of this year.

That was the fourth-largest amount of industrial development of any U.S. submarket at the start of 2020, behind Dallas-Ft. Worth, Atlanta, and Houston and ahead of Chicago, according to CBRE.

But COVID-19 has scrambled that picture, said Kurt Strasmann executive managing director with CBRE’s Orange County and Inland Empire offices.

“The COVID-19 pandemic has played right into the strength of the industrial sector,” Strasmann said.“It’s changed buying patterns because you have more people shopping online. Before, online shopping was mostly young people, but now every age group is doing it.”

“That has created a perfect storm for e-commerce, which is creating more demand for inventory. And when you have more inventory, you need more space.”

A five percent increase in inventory would be enough to spur demand for up to half a billion square feet in extra Industrial space nationwide, according to the CBRE study.

CBRE found that travel restrictions caused by COVID-19 have also disrupted supply chains, a development that has impacted most U.S. businesses and caused some to miss sales.

Because of that, a lot of businesses are redoing their supply chains, so they won’t get hurt by severe disruptions in the future. Instead of a one or two-month inventory, a lot of retailers want several months of inventory.

“Many businesses will take the lessons learned from recent supply chain disruptions to build stronger and more reliable domestic supply chains,” said Matt Walaszek, associate director of industrial research at CBRE, in the report. “Businesses will increase inventories to avoid product shortages, and, they will establish a stronger domestic pipeline to insulate against the reliance on foreign markets and long-distance transportation. 

“This will continue to drive more demand for industrial space in the U.S.”

The run on toilet paper and disinfectant products that happened in March and April – and, in the case of disinfectants, continues today – is an example of what retailers and their suppliers are trying to avoid in the future.

“The goal is to get the products to consumers when they need them, and that didn’t happen,” Strasmann said. “It’s not just that they could have sold a lot more than they did. A lot of people didn’t get what they needed.”

Redoing a supply chain –  defined by Investopedia as a network between a company and its suppliers to produce and distribute a product to the buyer – is a difficult process that varies depending on the business, according to Strasmann.

“In today’s world, supply chains are very complicated,” Strasmann said. “Each one is different, and restructuring them is difficult because it involves your port of entry and your ground transportation, among other things.”

Besides increasing their inventories, some businesses will also get closer to stores and manufacturing locations, which will increase the demand for more industrial space.

“I expect more construction in the Inland Empire,” Strasmann said. “They’re already building about 20 million square feet a year, and that is likely to continue.”

CBRE’s forecast 400 to 500 million square feet forecast might end up being high, but supply chain restructuring is real, said Paul Earnhart, a senior vice president with Lee & Associates and a longtime industrial specialist.

“I’ve heard that prediction and it’s a wild card as far I’m concerned,” Earnhart said. “Maybe it will happen, maybe it won’t. I just know we’re going to have larger inventories.”