Industrial is one of the most substantial commercial assets in real estate. Amid rising concerns of an economic downturn, there is much speculation about how the supply chain will be affected in the short and long term. Ryan Boozer, Managing Director and Partner, and Matt Dornak, Managing Director, Industrial Services at Stream Realty Partners, discuss the future of the supply chain and its effect on retail, manufacturing, and distribution.
What is the future of the supply chain?
RYAN BOOZER (RB): Everyone is talking about the future of the supply chain and wondering what it means for the industrial sector. We are only three months into observing how the pandemic could affect the supply chain, and there is just not enough data out there to make sense of the facts and accurately predict what the future holds.
MATT DORNAK (MD): I agree; the future of the supply chain is on everyone’s mind. Although we are optimistic about how quickly we can make a recovery, rebounding from COVID-19 is going to take some time. We don’t have a sense of timing on how long this period will last; however, we are beginning to see some bright spots and improvement in overall tenant activity. Whether these bright spots are reflective of market fundamentals or a function of pent-up demand remains unknown. The next 90 days are crucial and likely to reveal what could happen next.
What segments of the supply chain will feel the most impact?
RB: The majority of industrial tenants, deemed non-essential, are more or less in a holding pattern on their 2020 projections. On the other hand, food, namely grocery and essential goods, will experience the most significant shift. Compared to the last 15 years, people continue to shop differently—online grocers attributed to a sales growth of $6.6 billion in May. And we’re already seeing how grocers and essential goods are handling storage quantity count with the increase in online orders. And we’re also seeing how grocers and essential goods are handling storage quantity count with the increase in online orders. Models like ordering groceries from your car, in the drive-through, picking them out yourself, and then collecting them in the same trip may not be outside of the box in certain areas of the country.
Also, home improvement brands like Lowe’s and Home Depot haven’t seen a slowdown—both retailers have seen a rise in sales. The natural complement to either segment is in the bulk space—distribution and manufacturing.
MD: I agree, distribution is what I’m betting on. Even the most sophisticated logistics supplier in the world is shifting to keep up with changes occurring to the supply chain. And, international shipping companies like UPS and FedEx feel the strain as well, so much so that they are adding delivery surcharges to offset the rising costs.
What about the supply management of non-essential goods?
MD: I don’t think we have all the answers to how tenants will adjust to where they keep products, how much product they’ll have in stock, and where it will be stored. However, we should see more companies overstock product in the short term to better cope with and avoid any potential strain on the supply chain should the pandemic continue into late 2020 or 2021.
RB: I honestly don’t think anybody knows the answer to that right now. We’re all still trying to determine those answers, but I do believe business owners and executives are determining how to operate lean, and how to manage cash flows during unforeseen disruptions.
How do you envision factoring in last-mile facilities?
MD: The acceleration of more prominent companies as they shift toward eCommerce will likely lead to more last-mile facilities. You’re typically going to see your larger distribution facilities on the outskirts of a city. As residents continue to stay home, tenants in those markets are likely to establish additional warehouse distribution sites to deliver directly to the customer.
RB: Tenants can go on, without the need to pay for high-end retail space to display thousands of SKUs in limited quantities. Instead, we’re innovating on these last-mile centers—smaller distribution centers closer to the consumer base.
What do you see having the most significant impact on the future of the supply chain?
RB: If this is the conversation about what’s going to happen in the future, I don’t see how industrial does not stay the strongest asset class. Unless we have significantly expanded long-term economic downturns, I see industrial remaining very strong. Large distribution centers will continue to seek land that is more cost-effective, where transportation is efficient. It’s a cost-saving calculation of delivery incoming and outgoing. Industrial is necessary.
MD: We’re going to see a crazy shift toward ‘industretail’—a morph of the two sectors, with retail and industrial working together. For example, the concept of shortening the supply chain is not new; FreshDirect, an East Coast grocer, was a pioneer in the space. When you consider Walmart pilot tests of robotic vehicles to deliver inventory between warehouses, the expansion of people driving their cars into facilities to pick up groceries isn’t that far-fetched.
RB: From a retail and industrial perspective, the two have been crossing paths more in the last ten years. That’s going to accelerate in the years to come because of how goods are purchased. In the previous 60 days especially, there’s been quite a monetary investment going into data intelligence because of industrial’s challenge in the race toward efficiency and to create the largest margins, whatever and wherever they are. We know various supply chain providers are devoting significant time and money toward solving these issues for the future, as the race for efficiency and profitability continues.
Right now, while there is no definitive answer on the future of the supply chain—though, we believe the events around COVID-19 will accelerate its evolution much more quickly than anticipated.
Ryan Boozer is a Managing Director and Partner, leading Stream’s Industrial division in Dallas.
Matt Dornak is a Managing Director for Stream’s Dallas industrial division and is responsible for leading the strategic direction of the Dallas Industrial leasing team.