Bare shelves, slow deliveries and missing products are here to stay, at least for the next year and a half.
Hamid Moghadam, chief executive of the logistics powerhouse Prologis, said it will take at least that long for global supply chains to sort through the problems of today, including raw material shortages, canceled orders from manufacturers and a lack of workers to process and deliver finished goods.
Once those issues are sorted, the logistics industry must contend with the bigger fundamental question: how to prevent this type of breakdown from repeating. Speaking at a Prologis symposium, Moghadam said doing that will require the industry to shift from a mindset of efficiency to one of resiliency.
“That’s going to mean 10, 15 percent more inventory in the supply chain,” Moghadam said. “That means we’re going to need 10 to 15 percent more capacity in the supply chain, that means to need 15 percent more buildings or efficiency in buildings.”
Historically, retailers have employed a ‘just-in-time’ inventory management model, in which they aim to match their production as closely to consumer demand as possible. In the US, this process has become strikingly efficient, with the ratio of inventory to sales falling from more than 1.6:1 in the mid-1990s to less than 1.1:1 this year. While the strategy is capital efficient, it leaves little room for error.
The emerging strategy now is ‘just-in-case’ inventory management, which involves producing a surplus of goods and carrying larger inventories to avoid shortages, Carol Tomé, chief executive of the parcel carrier UPS, said. Tomé, who also spoke at the symposium, said groups such as Prologis will benefit from this shift, because it ultimately drives up demand for space.
“I suspect what we’re going to see around the world is working capital models are going to change pretty dramatically, which is great for Prologis,” Tomé said, “because [tenants are] going to need space for all that stocking inventory to make sure companies don’t run out of stock again.”
Through the third quarter of 2021, the US logistics market absorbed 115 million square feet, pushing the year-to-date total to 280 million square feet leased, according to Prologis, which is more than double the amount leased during the same period in 2020.
Prologis estimates the US alone will need more than 800 million more square feet of logistics space in the medium term to meet this growing demand, this includes some 600 million needed eminently to absorb the covid-era uptick in demand for goods bought online.
An unpredictable era
Some spaces are more important than others for addressing the market’s present shortfall, Moghadam said. Large urban centers are where need for more space is felt most acutely. In the US, those areas collectively have a vacancy rate of less than 2 percent, compared to the overall market’s 3.9 percent. But these markets expensive and available land is sparce, which has forced Prologis and its peers to get creative.
“What we can do is densify, go multistory, take some property types that were former retail, former office and convert them to logistics facilities. We’ve got to do pretty much everything we can,” he said. “All the parking lots, parking structures are being converted, so there’s not one solution, we’ve got to look many different places.”
Prologis already has a robust development pipeline to draw from in the months and years ahead, but Moghadam said it is not enough to solve the market’s capacity issues single-handedly.
“We’re in a fortunate situation that we have an incredibly large and well-located landbank,” he said. “We can build another $20 billion of real estate just based on what we have, but that alone is not going to do the trick. This problem is going to be with us for a while.”
Prologis and other owners of logistics space must also cope the rapid onset of obsolescence in their assets. With a heightened focus on sustainability, end users expect their spaces to meet the latest standards for energy consumption.
During the symposium, Huw Phillips, head of real estate for the package delivery service DHL, said as his company aims to electrify 60 percent of its last-mile vehicle fleet, it needs properties that can meet its charging needs in an environmentally friendly way. “The first challenge for us in real estate is making sure we have buildings that have got a power infrastructure to charge all those vehicles and that’s really a big step change that a lot of other companies haven’t woken up to yet,” he said. “We need battery storage to capture solar power to utilize it when our operation needs it, which is at night.”
While covid-19 has been the most prominent supply chain disruptor in modern memory, it is not the only reason for building redundancy into the system, Moghadam said. He points to freak occurrences, like a cargo ship getting wedged in the Suez Canal, as well as more frequent problems, such as increasing instances of extreme weather events, as reasons for retailers to be better prepared.
“The world is getting less and less predictable,” he said. “These supply chains that were built to perfection … engineers are very good at that, if you give them the conditions, they’ll make something that works to perfection, but boy if the input parameters change, it’s a whole new ball game.”