The U.S. industrial property market is on track for another record year in 2016, and the market could expand well into 2018 despite the possibility of higher interest rates that would increase the costs of carrying inventory, according to a leading industrial real estate and logistics firm.
JLL Inc.'s optimistic longer-term outlook for industrial demand and pricing goes beyond earlier projections by other real estate and logistics consultancies, which said the market would cool in 2017 as abundant new supply comes online to satisfy what has been a multiyear surge in demand. Richard H. Thompson, JLL's international director, supply chain and logistics solutions, said demand will be powered by the dramatic growth of e-commerce and the fulfillment networks developed and expanded to support it. E-commerce accounts for only 8 percent of all U.S. retail sales, according to JLL estimates. (Other estimates are somewhat higher than that.) That figure will undoubtedly rise as traditional retailers begin shifting massive resources that were once reserved for brick-and-mortar investments to the digital world.
Through the end of the third quarter, the national vacancy rate stood near all-time lows, at 5.8 percent, despite additional supply being delivered to the market, JLL estimated. Net absorption, which measures the amount of space occupied at the beginning and end of a reporting period, has been in solidly positive territory for the past few years, signaling that strong demand continues to absorb available square footage.
As of the end of the third quarter, JLL said that all of the top 50 industrial markets it surveys were experiencing either "peaking" or "rising" conditions.
Capitalization rates, which represent the ratio of an industrial property's value to the operating income it generates, will compress at a modest rate, meaning buyers will continue to pay more for space that generates the same amount of income, JLL said. For top-rated "Class A" properties, the widening spread between the so-called cap rate and yields on long-term Treasury bonds will allow for ongoing cap-rate compression, the firm said.
In virtually every market except for southern California and Seattle, where demand has been nearly off the charts and vacancies are in the low single digits, industrial portfolios can be acquired at cap rates of between 5 and 6.5 percent, according to JLL figures. As of Friday, the yield on the 30-year Treasury bond stood at 2.46 percent.
In addition, an absence of portfolio acquisition activity so far this year has left large amounts of capital on the sidelines that could potentially be committed to industrial property, JLL said. The sector's record performance in 2015 was capped by more than $20.5 billion in transactional activity in the fourth quarter, the best quarter for total closing volumes in history, according to the firm
In a presentation made late last month at the Council of Supply Chain Management Professionals' (CSCMP) annual meeting in Orlando, Kris Bjorson, JLL's international director retail/e-commerce distribution, said the strongest relative growth for 2016 will be in markets like Denver, Salt Lake City, and San Antonio. Those areas are not normally considered first-tier industrial property centers like southern California's Inland Empire east of Los Angeles, eastern Pennsylvania, and Indianapolis. This reflects the desire of traditional retailers and e-tailers to build fulfillment centers nearer to end markets so product fulfillment and delivery can be executed more rapidly, Bjorson said.
In May, Chicago-based real estate services giant Cushman and Wakefield projected a 5.9-percent industrial vacancy rate by year's end, on par with levels not seen in 30 years, and well below the 10-year average. The firm said at the time that an uptick in construction activity in 2017 would help to alleviate some of the space shortages.
The industrial market collapsed along with the rest of the U.S. economy during the Great Recession, but began recovering around 2011 and has been gaining steam ever since.
The market's current growth cycle will dovetail with what will likely be a period of rising interest rates. The Federal Reserve dropped the rates on federal funds—the interest on overnight loans between member banks—to near zero during the 2007-08 financial crisis that precipitated the recession. Since that time, the Fed has raised rates just once, a quarter-percentage-point increase last December. However, there is an emerging consensus it will be do so again this December, and many market participants believe more rate increases are in the offing. That's because the Fed is looking to normalize rate conditions as the U.S. economy improves in an effort to stop inflation before it can take root.
Businesses in 2015 experienced, on average, a 5.1-percent rise in inventory-carrying costs due to higher capital costs, according to the most recent annual "State of Logistics Report," which was written by the consulting firm A.T. Kearney for CSCMP and was presented by Penske Logistics. At the same time, the report found that business inventories—which had grown steadily at approximately 5 percent per year between 2009 and 2014—flattened out in 2015 due to sluggish domestic demand and a slowdown in exports, a byproduct of a strengthening U.S. dollar.
Businesses today have costlier inventory loads to finance than at any time in years, the report found. In 2009, inventory value stood at $1.93 trillion. At the end of 2015, it stood at $2.51 trillion, according to the report's data. However, the Kearney analysts said the data point to an inventory correction, not a more widespread problem such as a recession.
"Rents have been rising faster than interest rates and are at a level that justif(ies) new construction in most markets, so the concern of rising rates hasn't been an issue," said Jeffrey Havsy, chief economist in the Americas for Los Angeles-based real estate services giant CBRE Inc. "Rising rates are lower on the list of concerns for industrial developers."
The number of container ships waiting outside U.S. East and Gulf Coast ports has swelled from just three vessels on Sunday to 54 on Thursday as a dockworker strike has swiftly halted bustling container traffic at some of the nation’s business facilities, according to analysis by Everstream Analytics.
As of Thursday morning, the two ports with the biggest traffic jams are Savannah (15 ships) and New York (14), followed by single-digit numbers at Mobile, Charleston, Houston, Philadelphia, Norfolk, Baltimore, and Miami, Everstream said.
The impact of that clogged flow of goods will depend on how long the strike lasts, analysts with Moody’s said. The firm’s Moody’s Analytics division estimates the strike will cause a daily hit to the U.S. economy of at least $500 million in the coming days. But that impact will jump to $2 billion per day if the strike persists for several weeks.
The immediate cost of the strike can be seen in rising surcharges and rerouting delays, which can be absorbed by most enterprise-scale companies but hit small and medium-sized businesses particularly hard, a report from Container xChange says.
“The timing of this strike is especially challenging as we are in our traditional peak season. While many pulled forward shipments earlier this year to mitigate risks, stockpiled inventories will only cushion businesses for so long. If the strike continues for an extended period, we could see significant strain on container availability and shipping schedules,” Christian Roeloffs, cofounder and CEO of Container xChange, said in a release.
“For small and medium-sized container traders, this could result in skyrocketing logistics costs and delays, making it harder to secure containers. The longer the disruption lasts, the more difficult it will be for these businesses to keep pace with market demands,” Roeloffs said.
Jason Kra kicked off his presentation at the Council of Supply Chain Management Professionals (CSCMP) EDGE Conference on Tuesday morning with a question: “How do we use data in assessing what countries we should be investing in for future supply chain decisions?” As president of Li & Fung where he oversees the supply chain solutions company’s wholesale and distribution business in the U.S., Kra understands that many companies are looking for ways to assess risk in their supply chains and diversify their operations beyond China. To properly assess risk, however, you need quality data and a decision model, he said.
In January 2024, in addition to his full-time job, Kra joined American University’s Kogod School of Business as an adjunct professor of the school’s master’s program where he decided to find some answers to his above question about data.
For his research, he created the following situation: “How can data be used to assess the attractiveness of scalable apparel-producing countries for planning based on stability and predictability, and what factors should be considered in the decision-making process to de-risk country diversification decisions?”
Since diversification and resilience have been hot topics in the supply chain space since the U.S.’s 2017 trade war with China, Kra sought to find a way to apply a scientific method to assess supply chain risk. He specifically wanted to answer the following questions:
1.Which methodology is most appropriate to investigate when selecting a country to produce apparel in based on weighted criteria?
2.What criteria should be used to evaluate a production country’s suitability for scalable manufacturing as a future investment?
3.What are the weights (relative importance) of each criterion?
4.How can this methodology be utilized to assess the suitability of production countries for scalable apparel manufacturing and to create a country ranking?
5.Will the criteria and methodology apply to other industries?
After creating a list of criteria and weight rankings based on importance, Kra reached out to 70 senior managers with 20+ years of experience and C-suite executives to get their feedback. What he found was a big difference in criteria/weight rankings between the C-suite and senior managers.
“That huge gap is a good area for future research,” said Kra. “If you don’t have alignment between your C-suite and your senior managers who are doing a lot of the execution, you’re never going to achieve the goals you set as a company.”
With the research results, Kra created a decision model for country selection that can be applied to any industry and customized based on a company’s unique needs. That model includes discussing the data findings, creating a list of diversification countries, and finally, looking at future trends to factor in (like exponential technology, speed, types of supply chains and geopolitics, and sustainability).
After showcasing his research data to the EDGE audience, Kra ended his presentation by sharing some key takeaways from his research:
China diversification strategies alone are not enough. The world will continue to be volatile and disruptive. Country and region diversification is the only protection.
Managers need to balance trade-offs between what is optimal and what is acceptable regarding supply chain decisions. Decision-makers need to find the best country at the lowest price, with the most dependability.
There is a disconnect or misalignment between C-suite executives and senior managers who execute the strategy. So further education and alignment is critical.
Data-driven decision-making for your company/industry: This can be done for any industry—the data is customizable, and there are many “free” sources you can access to put together regional and country data. Utilizing data helps eliminate path dependency (for example, relying on a lean or just-in-time inventory) and keeps executives and managers aligned.
“Look at the business you envision in the future,” said Kra, “and make that your model for today.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.