As a follow-up to a Supply Chain Matters blog posting one year ago, we provide an update on the availability of logistics and warehouse space across United States. More than just an update on logistics costs, it is a stark reminder that supply chain teams need to up the commitment for embracing more integrated business planning and decision-making.
Once again, commercial real-estate trending data comes from CBRE, one of the largest global commercial real estate services and investment firms. The firm reports that the availability rate for U.S. industrial real-estate declined 10 basis points to a value of 7.2 percent in the second quarter of 2018, representing the 32nd consecutive decline.
Noted in the latest report is that continuing demand for warehouses, distribution centers and other industrial properties continuing to outpace available supply.
Demand for warehouses and distribution centers remains driven by the growth of e-commerce and the general strength of the U.S. economy. Overall, net absorption across the 55 markets tracked by CBRE amounted to 59 million sq. ft. in the quarter.
CBRE does expect declines in U.S. industrial availability to flatten out over time, but as supply chain leaders know all too-well, global supply chain activity levels are now under the umbrella of tremendous levels of uncertainty.
In a separate release, CBRE indicates that prime logistics rents increased globally in the year ending March 31, accelerating their growth in many markets, due to strengthening economies around the world and greater demand for distribution of goods bought both online and in stores. According to CBRE, prime logistics rents offer a means of gauging the strength and momentum of the high end of warehouse markets across the globe. That the growth of prime logistics rents has accelerated globally bodes well for the industry’s continued momentum.
Prime logistics rents reportedly increased by 3.2 percent across the globe in this year’s first quarter from a year earlier, according to CBRE. That exceeds the previous 12-month period’s 2.2 percent global increase.  Of the 10 global logistics hubs registering the largest gains in prime logistics rents in the year ending March 31, four are in the Americas, five are in the Eurozone and one is in China. The Eurozone region  posted a 4.3 percent gain in prime logistics rents, outpacing those of the Americas and Asia as well as its own.
As Supply Chain Matters has opined in prior commentaries related to the explosion in online customer fulfillment, there is often a trade-off of required real-estate square footage with the assumption that the customer fulfillment center assumes the real-estate burden of prior physical stores or distributors. Thus, the need for fewer overall physical stores, but new investments in customer fulfillment logistics and lower-density warehousing that focusses more on order volume productivity. The one continually changing variable will always be assumptions for overall merchandising and inventory needs.
As indicated in our year-earlier implications commentary, while online retailers like Amazon, Alibaba, Walmart, and others have been leading the charge for added expansion of customer fulfillment centers  across the U.S. and globally, the data now indicates that supply and demand forces have now driven up the real estate costs for others. Retailers and distributors are now reverted to search for abandoned shopping centers and factories as options, having to deal with challenges related to local ordinances. Once more, interest rates are trending-up, and thus will the cost of capital and carrying additional inventory balances.
As we have been continually noting, the current strong headwinds of added tariffs and trade headwinds are likely motivating manufacturers, retailers, and wholesalers to take added risks on either importing goods earlier to avoid pending import tariffs, re-routing goods to other geographies to avoid said tariffs, or storing export destined inventory in the hopes that current trade tensions will eventually subside.
All of these choices imply added storage needs or flexibility, in what is now documented as a very expensive industrial real-estate markets.
The Watch-Out
Supply chain teams need to be vary cautious, given the implications.
Incremental warehouse space can longer be viewed or assumed as a stop-gap strategy for added supply chain agility, given the increased costs involved. When added costs for warehousing are mixed with current exploding costs for surface transportation, the minefields are ever more present for negatively impacting expected business financial outcomes.
Now, more than ever, supply chain leaders need to have very close working relationships with their CFO’s and financial planning teams. The same holds true for procurement leaders and CPO’s, in making decisions as to consigned or vendor managed inventory decisions. More than ever, controlling, managing, and mitigating supply chain cost drivers has to be grounded in cohesive and integrated business planning with access to far more extensive data and information.
The reality of Integrated Business Planning is that it is quickly becoming what it was billed to be, an interactive process of business-wide decision making based on the weighting the many variables of customer fulfillment, cost, and business performance needs. It is fast becoming a process of weighting various decision-making scenarios with cost, service, operational or financial implication.
Is the current firefighting environment of dealing with continuous supply chain challenges and high uncertainties, keep an eye focused on the broader requirement which is more integrated business planning and decision-making that involves key business and functional stakeholders.
Bob Ferrari
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