Inside Logistics

Pandemic will change industrial real estate demand

JLL analyst points to revised network design, inventory strategies


April 2, 2020
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TORONTO –The Covid-19 pandemic will force a rethinking of supply chains, which will result in new approaches to sourcing, network design and inventory control.

Craig Meyer, president of industrial brokerage for JLL Americas, shared this perspective in a conference call today.

In the face of a triple threat – supply chain disruption, demand deflation and financial shock – industrial real estate will see adjustments once the recovery begins, Meyer said.

In contrast to retail real estate which is suffering from store closures, with landlords facing rent defaults, the current e-commerce boom is going to fuel expansion. “Across all the logistics markets it’s pedal to the metal to respond to the momentous increase in online demand in delivering product to an at-home workforce,” Meyer said. “By the end of the year there will be significant demand for leasing in the large e-commerce category of industrial buildings.”

On the other hand, those smaller businesses that supply bricks and mortar retailers, particularly in the apparel sector, along with those serving hospitality and travel businesses are suffering. Meyer said he expects to see numerous facilities in the 100,000 square foot range becoming vacant as those businesses fail.

Companies with global supply chains are confronting a new reality, Meyer noted. “Every single supply chain officer is rethinking their network and strategy” right now. He sees this manifesting as three trends that will emerge as the pandemic ends and business begins to normalize.

First will be repatriation of critical industries. Pharmaceutical production and technology will be the primary focus, with a new appreciation of their importance to national security. As seen during the pandemic, masks and generic drugs are largely made in China, and that supply line was massively disrupted.

Second, companies will seek to diversify sourcing. This pandemic is not the first time a shock has sent procurement offices scrambling to find new sources of supply, but this time Meyer says he sees a potential increase in nearshoring, which may mean increased production of parts and critical components in markets such as Canada and Mexico.

Third, Meyer expects that inventory strategies will be adjusted to keep more safety stock. This may mean requirements for larger warehouses, and shifts in network design, along with downstream implications for logistics networks. “With our just-in-time economy, these shocks show we need more inventory on hand to meet demand,” he said.

Another immediate effect of the pandemic has been a decline in orders going from North America to Asia, resulting in a container imbalance that has recently been rectified with numerous empty repositioning sailings. With Chinese manufacturing coming back online, some west coast ports and importers are anticipating a surge in inbound freight. “We have been getting calls for container storage locations,” he noted.