Macro-Economic Trends Reshape Supply Chain, Positively Impacting Industrial Real Estate
By:  Phil Simonet, Principal

While some sectors of commercial real estate are challenged following the pandemic and an anticipated recession, industrial real estate has been strengthened due to societal pressure and policy changes.  Societal pressures are creating the demand to bring back manufacturing from overseas.  Several policy changes – including the CHIPS Act, and Trump-era tariffs — made that move more likely. Manufacturers of computer chips, pharmaceuticals, and other high-value products are incentivized through changes to tax code and import rules, which make it more popular and profitable to produce products domestically.  A likely outcome will be suppliers of those components clustering around the high-value manufacturers, resulting in companies migrating to cluster near certain manufacturers. A final benefit to the end use, is likely a cost-effective product that is less impacted by shipping and fabrication delays. In the real estate world, industrial properties are poised to be in high demand in specific clusters across the United States.

Hybrid Office Image - Games

Reconfiguration of the Supply Chain Underway

At the macro level, we expect this iterative process to reconfigure the supply chains. At the micro level, we expect individual businesses to stock more input goods and finished goods – as opposed to the last 20 years of “just-in-time delivery.” During the COVID-19 shutdown many companies learned that not having the available components to complete their manufacturing process could cause serious delays.  Fear of a recurrence of that bottleneck, gives more credence to the projected increase in storage and distribution centers.

Distribution networks, like Amazon, are evolving due to consumers’ expectations of how quickly they can physically have a product. In the previous centralized network, goods would move from hub, to spoke, to store. The stores are generally located near other stores. Then, consumers would drive from geographically dispersed areas to the store to purchase and physically possess the item. In the decentralized network, goods move from hub, to spoke or maybe multiple spokes. From here, goods travel to the end consumer, skipping the cluster of stores.  This new decentralized distribution network requires much more storage of finished goods near population centers to ensure faster delivery of a larger catalogue of items. Ultimately, the world of industrial real estate will need to evolve to offer new products that support this new model – but ultimately, this change will positively impact industrial real estate.

Importing of Goods Will Shift

This change doesn’t mean an end of the import business. Certain low-value, non-essential products (like Mardi Gras beads) will continue to be produced abroad and imported. In addition, consumers will still go to stores to buy those and many other items, supported by a desire to touch and feel. But the societal and policy changes that encouraged a move of the supply chain to domestic locations is here to stay – the manifestation, not cause, of larger societal and global trends and themes.

Industrial Real Estate Owners and Developers Should Look for Opportunities to Support the New Supply Chain

We expect that owners and users of industrial real estate will dictate changes to the form, function, and location of these new clusters of storage and distribution centers that are designed to simplify and reduce the cost of manufactured goods across the supply chain. Those new clusters will need highway access, and access to employment – and while many of those clusters exist already in the industrial market, they continue to develop across the Twin Cities.

Q3-2022 Industrial Market Report

Our knowledgeable, experienced team of real estate professionals is here
to help you navigate the ever-changing industrial market.

Phil Simonet
Contact:
Principal

952-854-8381

Phil.Simonet@ForteREP.com

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