For a long time, many thought that globalization made traditional geopolitics obsolete. The hope was that the benefits of economic integration in the global economy were such that geopolitical tensions could be put aside. No nation would start a war for fear of being excluded from access to a worldwide economic network. Hence, Thomas Friedman’s “Golden Arches” theory of conflict prevention suggests that no two nations with McDonald’s would go to war, for example.
Such thinking seems over-optimistic today. Russia’s invasion of Ukraine thoroughly undermines Friedman’s theory. Putin likely believed that Ukraine’s ports, natural resources and strategic buffer to Russia’s vulnerable west outweighed any economic benefits that Russia may have gained from peaceful trade.
The imposition of the EU import ban on Russian oil marked the end of a global oil market, while hard-hitting sanctions excluded Russia from many international markets. But this can be seen as a continuation of a trend.
Global trade has plateaued since 2008. Exacerbated by the deterioration in the relationship between the US and China, we have seen an increase in tariffs, trade barriers and protectionist policies.
Globalization has stalled. Events in 2022 suggest the world has entered a phase of deglobalization.
“Reshoring, near-shoring and friend-shoring are all terms that are becoming more common”
The implications for global supply chains are enormous. Businesses are reconsidering their strategies and locations. Reshoring, near-shoring and friend-shoring are all terms that are becoming more common as companies respond to the rise of protectionist policies and the potential partitioning of the global economy.
This potential reconfiguring of supply chains comes at a critical moment for investors in logistics properties. Looking back over the past five or six years, the outperformance of the industrial sector has been one of the defining features of the market. But 2022 saw the logistics boom come to an end. Industrial property values have not avoided the downward pressure experienced in other sectors.
As we enter 2023, the outlook is challenging. Given geopolitical uncertainties, the decision of where to invest is tough. Most real estate investors are not experts in international relations. Even if they tap the expertise of those who proclaim to be, their track record could be better. For example, in the mid-1980s, many experts predicted that Japan would surpass the US as the world’s largest economy.
So, if we know global supply chains will change but have little idea how, how should real estate investors react? Part of the answer, of course, is to diversify, including away from an investor’s home country. The future will surprise us, and the best way to prepare is to build up holdings in various geographies.
In addition, real estate investors may focus their logistics exposure on assets close to consumers. While there are likely to be significant changes to where manufacturing occurs, I expect more continuity in where consumption occurs.
Investors should favor assets that facilitate the delivery of goods to large cities with robust labor markets and strong demographics. As we adapt to a more fragmented world, such investments add resilience to logistics portfolios.