What Those Supply Chain Challenges Will Mean For CRE Investors

The transformation of supply chain strategies will take years to unfold – but the disruptions will ripple across North America and will have noticeable implications over local and regional economies in the long-term, according to one industry watcher.

In a recent video analysis, Marcus & Millichap’s John Chang notes that companies have been addressing supply-chain challenges in a few key ways.

Many have increased their order quantities and then warehoused the inventories locally to protect against shortages in what Chang deems a short term solution.

“But we’re also starting to see companies adopt a longer term solution,” he notes. “Companies are looking at reshoring and near-shoring their manufacturing systems. There are a lot of factors driving this change, and if the trend holds, as I suspect it will, it will significantly affect all types of commercial real estate across the US and in Canada.”

With the port of Shanghai shut down since March, the cost of shipping a container to the US is now up 10 times over pre-pandemic levels. Transporting goods from China also now takes about 80 days, compared to just 48 prior to the pandemic. 

“Looking back in time, companies flocked to China to capitalize on lower manufacturing costs, but the tide is turning,” Chang says. “Today manufacturing labor costs in China are higher than they are in Mexico” – and while manufacturing costs in the US and Canada are still triple that of China, automation and labor productivity is narrowing the spread.

To address the supply chain challenges, many companies are setting up manufacturing operations in North America, which will save on transportation costs and time alike.  And “the flow of goods will likely be more reliable and consistent,” Chang predicts.

Freight traffic from Canada to the US has also increased by 10.5 percent since the onset of the COVID crisis, and freight from Mexico has increased by 21% over pre-pandemic levels.  Chang predicts this trend will increase as companies look to shorten supply chains – and that could have a significant impact on CRE.

“As more freight comes in from Mexico and Canada, reliance on the ports of LA and Long Beach could ease,” he says. “On the flip side, imports coming through the ports of Laredo, Texas, Port Huron, Michigan, and Otay Mesa, California have surged. And the big cities closest to those ports – San Antonio, Detroit, and San Diego – have all posted record-breaking industrial space demand. This will in turn support those local economies, creating jobs, housing demand, and retail consumption.