Among the far-reaching impacts of the Covid-19 pandemic is a supply-chain crisis that has resulted in severe disruptions in the availability of both commodities and raw materials. Manufacturing plants ranging from automotive, household appliances, recreational vehicles to home goods and electronics have been forced into temporary shutdowns while raw materials are delayed. Manufacturers are resorting to air-shipments of materials, at a substantial premium in shipping costs, in order to simply keep production lines going. A sample of the surging commodity market increases are listed below:
Lumber: +265%
WTI Crude: +210%
Gasoline: +182%
Brent Crude +163%
Steel +161%
Heating Oil: +107%
Corn: +84%
Copper: +83%
Soybeans: +72%
Silver: +65%
Sugar: +59%
Cotton: +54%
Platinum: +52%
Natural Gas: +43%
Palladium: +32%
Wheat: +19%
Coffee: +13%
Gold: +3%
The Direct Impact On Commercial Real Estate
Building construction prices have substantially increased
These increases have been partially offset by lower labor costs due to the drop in demand for projects through the pandemic however, the activity is picking back up and that offset will likely disappear.
Developers will be much less likely to build projects on a speculative basis
With the strong demand for industrial space, the commodity price increases will be easier to pass along and will drive increases in rents across the board.
The office, where the timetable to return is still nebulous and the impact on the demand will take a couple of years to determine
Many projects will be tabled while the equilibrium is settling in.
Retail properties are being repurposed or repositioned to incorporate more experiential tenants
The cost to build new has substantially increased and challenges the feasibility of projects across all sectors, at least until rates stabilize to support the higher construction costs
The Indirect Impact On Commercial Real Estate
The rapid acceleration to the shift to e-retailers
Amazon, Walmart, Instacart, and many others have taken large blocks of industrial space to accommodate the surge in demand for online retailing. By some estimates, Amazon is responsible for almost half of the industrial absorption over the last year in the large metropolitan markets.
Many manufacturers are reevaluating their inventory systems and are planning to increase their inventories to minimize supply-chain risks
Some of these shifts will be temporary but others may opt to be less dependent on just-in-time inventory management. Manufacturers are also redesigning the supply chains to minimize the disruption of products from any single market in order to build a more resilient supply chain. As inventory stockpiles increase, manufacturers will require more square footage in their warehouses to store the raw materials. This will result in a surge in expansion projects and manufacturers relocating to larger facilities.
IIOT (Industrial Internet Of Things) has proven to have huge productivity, cost savings, and safety improvements on the industrial and manufacturing supply chain. The improvements in inventory management, product design, and quality controls are giving clear insight into how much space is needed and how to best use warehouse space.
