Supply Chain Disruptions During the COVID-19 Crisis

Governments at all levels are trying to deal with the health effects of the coronavirus, including racing to store and deliver tests and protective personal equipment where they are needed. But that highlights an ongoing problem: As workers stay home and consumers shift their spending patterns, the virus is also hammering supply chains.

In a recent NAIOP webinar, three experts from the CoStar Group Advisory Services team talked about what’s currently going on with supply chains, and what might happen in the weeks and months ahead.

First, they took a sobering look at the economic damage. “For every one percentage point increase in unemployment, there is a one percentage point decrease in Gross Domestic Product,” noted Michael Cohen, CoStar Group’s vice president of advisory services. Because unemployment is soaring, Cohen said he predicts there will not be a V-shaped recovery, as many are hoping for.

Instead, it will take time for the economy to get back to where it was as recently as February. “Job losses mean consumers will not be buying goods at the rate they were before [the outbreak],” Cohen warned. “Lockdowns have forced consumers to change their habits, and these changes are likely to remain” after the shutdown. Supply chains will need to adjust.

One effect will be on imports, since so many products come from overseas. So far, imports are down as the world deals with the pandemic. “The main impact was driven by reduction in demand,” CoStar senior consultant Juan Arias explained. “Around one-third of those impacted have responded by shutting down parts of their supply chain.” This, of course, is shaping the ways in which many companies do business.

But the news isn’t exclusively bad. When the crisis began in March, experts predicted bottlenecks at ports, but that hasn’t developed. Instead, partly because there are fewer imports coming in, ports generally continue to operate normally. It can be difficult to get products from ships to markets, though. Trucking remains a concern, and Arias predicted the virus crisis will speed the adoption of autonomous trucking.

CoStar Advisory Services Consultant Joseph Biasi added that their team expects many companies will respond to the crisis by reshoring manufacturing, by which they mean moving manufacturing out of China, not back to the United States but to another foreign country. For example, Biasi said he expects smaller Asian countries, including Vietnam, to benefit as companies shift away from China. Countries closer to the American mainland, such as Mexico, could also benefit.

Meanwhile, Biasi warned the U.S. lacks much of the capacity that would be needed to onshore, or bring production back within our borders. The exceptions to this will be industries like medical equipment and pharmaceutical manufacturing, which require strict adherence to regulations around quality control.

Because of the pandemic, manufacturing output in the U.S. is expected to decline 13 percent this year. “We do not expect companies to expand their inventories” as a result of the crisis, Biasi said. Instead, he said he expects companies to try to demand more oversight of their supply chains, yet stay with the policy of “just-in-time” supply for most products.

What does this mean for the industrial space?

Arias said the CoStar Advisory Services team expects vacancies of logistics space to rise to a range of 6 and 8 percent over the next two years. Their research predicts the slowdowns may be focused in particular markets that rely on trade. Construction will also slow as demand does, and cities with high exposure to troubled industries will suffer most. Cities including Detroit (automotive), Las Vegas (leisure and hospitality) and Houston (oil) will be among those hardest hit.

Meanwhile, bet on e-commerce. E-commerce tenants have taken more than 13 million square feet of industrial space this year alone, the team’s research reports. Amazon is hiring, and delivery is booming. “Strong absorption of smaller assets is partly driven by the continued demand for last-mile space,” Arias said. That could benefit attractive metro areas – those with significant populations as well as high-income levels – as well as those with above-average consumer buying power and willing buyers.

According to CoStar Advisory Services research, the majority of items sold in March were healthcare and food items. Arias said the research team expects this trend to continue, even after “panic buying” dies down. There is also a threat to food-services businesses as people prepare food and eat at home; that will benefit grocery suppliers, including Amazon.

Companies such as Target and Walmart, with a mix of grocery, delivery and pick-up, should also do well. The pandemic may also encourage investments in automated facilities that can handle food supplies for consumers. “We will see an improvement in food distribution” in the months ahead, said Arias.

Finally, Arias said that refrigerated space, including warehouses and trucks, also benefit from this increased grocery demand. The high cost and complexity of building cold storage offer an opportunity for savvy CRE operators who can figure out ways to provide this space where it is needed, Arias said.

“We expect overall industrial demand to slow,” Arias said. However, they expect growing demand for groceries and delivery services, particularly for a last-mile facility in a good location.

Supply chains will look different after the pandemic passes. But as is often the case, the CoStar Advisory Services experts said they expect that the location of facilities will be the key to supply chain success.

Content and strategies shared on NAIOP blog posts are intended to provide information and insights to industry practitioners and do not constitute advice or recommendations. NAIOP and its blog authors disclaim any liability for actions taken as a result of these blog posts.

Visit the NAIOP Response: COVID-19 page for critical resources and knowledge to support you now.

You Might Also Like