Industrial Big Bets Post-COVID
It has been a year since the world shutdown. For some, the last 12 months have been the longest year of our lives.
Yet, as of Mid-March, U.S. COVID-19 cases are trending down, and the vaccine is gaining ground, ushering in enthusiasm for the economy and the country that better days may be just around the corner. Moreover, the latest report from the National Association of Manufacturers revealed 88% of large and medium-sized manufacturers exhibit strong optimism for the remainder of 2021.
Growing momentum is not without substantial challenges for companies that rely on global supply chains to fuel manufacturing, e-commerce, and distribution businesses. The pandemic’s effects over the last year are dramatic, especially on transportation costs.
Transportation Costs are Up
A recent article from the Wall Street Journal states overseas shipping costs to the U.S. west coast are 3 to 4 times higher year-over-year. Between 30 and 40 container ships struggle to move through west coast bottlenecks at any point in time. East coast shipping costs are slightly better but are double in 2021. Much of the rising costs are attributable to a lack of 40-foot containers across the world and fewer ships in the water. Outbound shipping containers to countries still snarled in the pandemic are not coming back to U.S. shores, and supply is low.
In contrast, U.S. industrial demand is increasing. The February report from the Institute of Supply Management showed manufacturing is in its ninth consecutive month of recovery. Companies are focused on increasing production and workforce. Orders are picking up, but delinquencies in supply shipments, wide-scale shortages and delays are driving up costs. When supply is low and demand is high, pricing pressure comes next.
Bet #1 – Intermodal to the Rescue
As a response to growing supply chain challenges, companies can regionalize or reposition production, supply, and inventory closer to end-users to help drive down transportation costs. The question is, where can companies capitalize on opportunities? One place to start looking is near intermodal, perhaps favoring terminals that handle trailer-on-flatcar to sidestep the container shortage.
Industrial real estate development has exploded near many east coast ports in the last decade, including the Port of Savannah. Savannah is the third-largest container gateway and was the fastest-growing industrial real estate market in 2019.
Furthermore, shipments from U.S. ports like Savannah to inland intermodal facilities are increasing. In 2020, rail shipments from ports to intermodal were 25% higher than in 2019. The intermodal strategy minimizes trucking bottlenecks and passes on 10-12% transportation cost savings using rail.
In the past, inland dry ports were only near major cities like Chicago, Atlanta, or Kansas City. However, inland ports are now flourishing in smaller, more rural areas providing port access hundreds of miles from the ocean. These second and third-tier markets are attractive to companies seeking lower operating cost environments.
Over the short-term and long-term, the industrial real estate opportunity seems likely to increase near these burgeoning economic engines.
Bet #2 – E-commerce Explosion
E-commerce demand has exploded across the U.S. landscape. Before 2020, the most robust year-over-year growth was 18% back in 2011. After the great recession, the smartphone became ubiquitous across the consumer landscape, establishing a new retail sales channel. In 2020, e-commerce sales grew 44% on the back of the pandemic shut down, ushering in a giant wave of demand.
To ride the wave, companies that need industrial real estate are likely to target second-tier markets that offer an ample supply of lower-cost workers and reduce recurring operating costs. Fueling some of the flight to second-tier markets is the growing scarcity of available industrial real estate in major markets.
Companies may target second and third-tier markets that have been hit harder by the pandemic for opportunities to build long-term partnerships with the community. After the last economic slowdown, communities and states stepped forward with aggressive incentives to recruit new businesses.
Summary and Next Steps
Whether a company is looking to regionalize existing pieces of their supply chain or add new locations, targeting inland ports and second-tier markets could be a prudent strategy. Proximity to each can help lower transportation costs, identify a substantial supply of low-cost workers, and develop long-term relationships in communities that will invest in the business.