"For most companies, today's dysfunctional supply chains are a headache and a cost. For warehouse owners like Prologis, they are yet another tailwind.
Global air and sea freight routes have become more expensive and less reliable during the pandemic. In March, just 7% of sea shipments from Asia to North America arrived on time, while 6% were on time for the Asia-to-Europe route, eeSea data shows. Even big companies with bargaining power can expect to pay contract freight rates around five times higher than in 2019. Fresh Covid-19 lockdowns in China and coming wage negotiations with West Coast dockworkers in the U.S. spell further trouble ahead.
That points to stockpiling, which should boost demand for warehouses. Companies need to hold more goods so they don't miss out on sales because of freight delays. Based on what they are hearing from tenants, big logistics landlords think inventories will eventually settle 10% to 15% higher than prepandemic levels.
Consumer spending was so strong last year that companies haven't yet had a chance to build up extra supplies. In the U.S., the ratio of inventories to sales for all businesses is currently 1.25, according to the U.S. Census Bureau, below the average since 1998.
Stockpiling could therefore create additional demand for supply that is already constrained. Companies raced to lease more warehouse space as shoppers moved online during pandemic lockdowns. In the U.S., vacancy rates for logistics property fell below 4% for the first time on record in 2021, JLL data shows. Vacancy rates in Europe fell from 5.1% to 3.5% over the course of last year, according to Savills.
Tight supply means industrial landlords have a much better chance of negotiating inflation-beating rent increases than owners of other commercial real estate such as malls or offices. In the U.S., warehouse rents increased by 11% last year, comfortably ahead of the rise in consumer prices. Prologis expects to raise rents by the same amount again in 2022. In parts of London, where supply is especially tight, rents increased by as much as 30% last year, according to European warehouse owner Segro. The market is so strong that logistics landlords want to avoid offering long-term contracts to tenants or inflation-indexed leases that would cap their upside.
Capital markets are racing to catch up. Around half of all funds currently being raised globally for investment in real estate are now targeting industrial and logistics, Segro reports. Prologis became the biggest listed real-estate investment trust in the U.S. by market value in January, overtaking cell-tower owner American Tower. Once a bit player, Segro is now Europe's second most valuable REIT after German residential landlord Vonovia.
One much-discussed trend that could damp the excitement is a shift in production closer to home. This would be a solution to supply-chain problems, but a drastic and expensive one. For example, companies would need to invest $1 trillion over five years to relocate all foreign manufacturing based in China that isn't destined for the Chinese market, according to estimates from Bank of America. And this doesn't factor in the higher cost of operating in higher-wage markets.
Labor shortages in the U.S. and rising energy prices in Europe may deter big moves for now. Global trade reached a record high in 2021, according to United Nations data, so there is little evidence of a move to domestic manufacturing yet.
For now, reshoring is the trend everyone is talking about that isn't happening. Demand for warehouses from both tenants and investors should stay strong for a good while yet." [1]
1. Supply-Chain Chaos Is Great for Warehouse Stocks --- Global transport problems may bring manufacturing closer to home; until then, urge to stockpile will boost demand for storage. Ryan, Carol. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 11 Apr 2022: B.10.
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